Break-even analysis. Binders-For-School Ltd is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $10,000 per year versus the $2,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $30. The company will charge $60 for each textbook and has determined that the high-capacity machine will be more economically beneficial if sales are greater than 800 books. What is the contribution margin under the low-capacity machine scenario?
A) $10
B) $20
C) $30
D) $40

Question

Quizplus · Accepted Answer

To find the contribution margin under the low-capacity machine scenario, we need to first calculate the variable cost per unit. This is not given directly in the question, but we can use the information provided for the high-capacity machine to estimate it.

Variable cost per unit = Cost per unit for high-capacity machine - Fixed cost per unit for high-capacity machine
Variable cost per unit = $30 - $10 = $20

Contribution margin = Price per unit - Variable cost per unit
Contribution margin = $60 - $20 = $40

So the contribution margin under the low-capacity machine scenario is $40.

To determine whether purchasing the high-capacity machine is the best choice, we need to calculate the break-even point for each machine.

Break-even point for low-capacity machine = Fixed costs / Contribution margin
Break-even point for low-capacity machine = $2,000 / $40
Break-even point for low-capacity machine = 50 units

Break-even point for high-capacity machine = Fixed costs / (Price per unit - Variable cost per unit)
Break-even point for high-capacity machine = $10,000 / ($60 - $30)
Break-even point for high-capacity machine = 800 units

Since the company will sell more than 800 books, the high-capacity machine is the more economically beneficial choice. Therefore, the best choice is:

Choice: Purchase the high-capacity machine.

Break-Even Analysis