Kumar produces large decorative tiles used in home decor.The tiles sell for $720 and the fixed monthly operating costs are as follows:

Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.60 went to cover his fixed costs,and that anything past that point was pure profit.
Kumar's is planning to increase the selling price to $840.What impact will the increase in selling price have on the breakeven point in units?
A)It will stay the same.
B)It will go down from 12 to 10 units.
C)It will go up from 10 to 13 units.
D)It will go down from 10 to 8 units.

Question

Kumar produces large decorative tiles used in home decor.The tiles sell for $720 and the fixed monthly operating costs are as follows:

Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.60 went to cover his fixed costs,and that anything past that point was pure profit.
Kumar's is planning to increase the selling price to $840.What impact will the increase in selling price have on the breakeven point in units?
A)It will stay the same. 
B)It will go down from 12 to 10 units. 
C)It will go up from 10 to 13 units. 
D)It will go down from 10 to 8 units.

Quizplus · Accepted Answer

D)Contribution margin per unit = $720 × 0.60 = $432
Total fixed costs = $840 + $2,800 + $510 = $4,150
Required sales in units = (Fixed costs + Target profit)/ Contribution margin per unit
Required sales in units = ($4,150 + 0)/ $432 = 10 units
Revised contribution margin = $432 + ($840 - $720)= $432 + $120 = $552
Required sales in units (Revised)= ($4,150 + 0)/ $552 = 8 units

Kumar Produces Large Decorative Tiles Used in Home Decor