Cleason sells a single product at $14 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of $800,000, and fixed costs of $560,000. Management believes that a $3 drop in selling price will boost unit sales volume by 20%. Which of the following correctly depicts how these two changes will affect the company's break-even point?

Question

Quizplus · Accepted Answer

To calculate the break-even point, we need to find the number of units needed to be sold to cover the total costs (fixed and variable) of the company.

First, let's calculate the break-even point before any changes:

Break-even point = (Fixed Costs) / (Price per unit - Variable Costs per unit) 
Break-even point = $560,000 / ($14 - $10) = 70,000 units

Now, let's calculate the break-even point with the proposed changes:

New selling price = $14 - $3 = $11 per unit 
New unit sales volume = 80,000 x 1.2 = 96,000 units

Total Variable Costs = $800,000 + ($11 x 96,000) = $1,976,000

Break-even point = (Fixed Costs) / (Price per unit - Variable Costs per unit) 
Break-even point = $560,000 / ($11 - $10) = 560,000 units

As we can see, the break-even point increases from 70,000 units to 560,000 units with the proposed changes. Therefore, choice C is correct.

Cleason Sells a Single Product at $14 Per Unit