Forrester Company is considering buying new equipment that would increase monthl
ID: 2605035 • Letter: F
Question
Forrester Company is considering buying new equipment that would increase monthly fixed costs from $432,000 to $450,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $120 is not expected to change. Forrester's current break-even sales are $1,080,000 and current break-even units are 9,000. If Forrester purchases this new equipment, the revised break-even point in dollars would be:
$864,000
$1,080,000
$900,000
$1,260,000
$450,000
a.$864,000
b.$1,080,000
c.$900,000
d.$1,260,000
e.$450,000
Explanation / Answer
Calculation of Revised Break-even Point
Break-even Point (in units) = Fixed Cost/(Selling Price - Variable Cost)
= $450,000/($120 - $60)
= $450,000/$60
= 7500 units
Break-even Point (in Value) = Break-even Point X Selling Price
= 7500 X $120
= $900,000
Therefore Option C is Correct, i.e. $900,000
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