Winthrop Manufacturing produces a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Winthrop can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. What effect would the purchase of the new machine have on Winthrop's break-even point in units?

Question

Quizplus · Accepted Answer

The break-even point in units is calculated as Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). The new machine increases fixed costs to $271,400 ($260,000 + $11,400) and decreases variable costs to $20.50 per unit ($24.00 - $3.50). The original break-even point is $260,000 / ($50 - $24) = 10,000 units. The new break-even point is $271,400 / ($50 - $20.50) = 9,200 units. The difference is a decrease of 800 units, making option B correct.

Winthrop Manufacturing Produces a Product That Sells for $50