Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit.The selling price of $100 is not expected to change.Forrester's current break-even sales are $400,000 and current break-even units are 4,000.If Forrester purchases this new equipment,the revised contribution margin ratio would be:

Question

Quizplus · Accepted Answer

Before purchasing new equipment:
Fixed costs = $120,000
Variable costs = $70
Selling price = $100
Contribution margin = $100 - $70 = $30

Break-even sales in dollars = Fixed costs ÷ Contribution margin ratio
$400,000 = $120,000 ÷ Contribution margin ratio
Contribution margin ratio = 0.3 or 30%

After purchasing new equipment:
Fixed costs = $150,000
Variable costs = $60 ($70 - $10)
Selling price = $100
Contribution margin = $100 - $60 = $40

Break-even sales in dollars = Fixed costs ÷ Contribution margin ratio
$450,000 = $150,000 ÷ Contribution margin ratio
Contribution margin ratio = 0.333 or 33.3%

Revised contribution margin ratio = (Contribution margin ÷ Selling price) x 100
Revised contribution margin ratio = ($40 ÷ $100) x 100
Revised contribution margin ratio = 40%

Therefore, the revised contribution margin ratio would be 40%, so the best choice is C.

Forrester Company Is Considering Buying New Equipment That Would Increase