Forrester Company is considering buying new equipment that would increase monthl

Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $379,500 to $507,000 and would decrease the current variable costs of $75 by $10 per unit. The selling price of $130 is not expected to change. Forrester's current break-even sales are $897,000 and current break-even units are 6,900. If Forrester purchases this new equipment, the revised break-even point in dollars would be:

Multiple Choice

a. $759,000.

b. $897,000.

c. $345,000.

d. $1,035,000.

e. $1,014,000.

Explanation / Answer

Fixed Cost = $ 507,000

Variable Cost =$ 65 Per Unit

Selling Price = $ 130 Per Unit

Hence, Revised Contribution Margin Ratio = (Selling Price -Variable Cost ) / Selling price

= $ 130 - $ 65 / $ 130

= 0.50

Hence the revised break-even point in dollars = Fixed Cost / Revised Contribution Margin Ratio

= $ 507,000 /0.50

= $ 1,014,000

Hence the correct answer is e. $ 1,014,000

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