Kumar produces large decorative tiles used in home decor. The tiles sell for $ 7

Question

Kumar produces large decorative tiles used in home decor. The tiles sell for $ 740 and the fixed monthly operating costs are as follows: Rent and utilities $ 800 Management salaries 2 comma 500 Other expenses 520 Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $ 0.60 went to cover his fixed costs, and that anything past that point was pure profit. Kumar's is planning to increase the selling price to $ 840 . What impact will the increase in selling price have on the breakeven point in units?

Explanation / Answer

Solution: It will go down from 9 to 8 units Working Notes: Current contribution margin per unit = Selling price per unit x Contribution per $ of sales =$740 x 0.60 =$444 Current Break even point units =Current monthly fixed cost/Current contribution margin per unit Current monthly fixed cost = Rent + salaries + other =$800+$2,500+520 =$3,820 Current Break even point units =Current monthly fixed cost/Current contribution margin per unit =$3,820/$444 =8.60360 units =9 units When selling price becomes $840 Revised contribution margin = Current contribution margin +(New selling price - Current selling price) =$444 +($840-$740) =$544 Now Revised break even point = Total monthly cost / revised contribution margin per unit =$3,820/$544 =7.0220588 units =8 units Hence Break even point in units will go down from 9 units to 8 units Notes: Product cannot be sold , sub part , hence , break even units are rounded off to upper nearest whole number. Please feel free to ask if anything about above solution in comment section of the question.

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