Compute Break-Even Point at the operating profit level : Q = Fixed Costs / Contr

Question

Compute Break-Even Point at the operating profit level:

Q = Fixed Costs / Contribution Margin per Unit

Ensco Lighting Company has fixed costs of $100,000, sells its units for $28 and has variable costs of $15.50 per unit.

Compute the breakeven point.

Ms. Watts comes up with a new plan to cut fixed costs to $75,000. However, more labor will now be required, which will increase variable costs per unit to $17. The sales price will remain at $28. What is the new breakeven point Was the new plan a success.

Explanation / Answer

Break-even analysis
Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and has variable costs of $15.50 per unit.
1. Compute the break-even point.

Break even point = Fixed cost/(selling price - Variable cost)

= 100,000/(28 - 15.50)

= 8,000 units

2. Ms. Watts comes up with a new plan to cut fixed costs to $75,000. However, more labor will now be required, which will increase variable costs per unit to $17. The sales price will remain at $28. What is the new break-even point?

New Break even point = New Fixed cost/(selling price - New Variable cost)

= 75,000/(28 - 17)

= 6,818 units

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