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Financial & Managerial Accounting
Found in: Page 834
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

SBD Phone Company sells its waterproof phone case for $90 per unit. Fixed costs total $162,000, and variable costs are $36 per unit. How will the break-even point in units change in response to each of the following independent changes in selling price per unit, variable cost per unit, or total fixed costs? Use I for increase and D for decrease. (It is not necessary to compute new break-even points.)

Change

Break-even in unit will

1. Total fixed cost to $190,000

2. Variable cost to $34 per unit

3. Selling price per unit to $80

4. Variable cost to $67 per unit

5. Total fixed cost to $150,000

6. Selling price per unit to $120

Change

Break-even in unit will

1. Total fixed cost to $190,000

I

2. Variable cost to $34 per unit

D

3. Selling price per unit to $80

I

4. Variable cost to $67 per unit

I

5. Total fixed cost to $150,000

D

6. Selling price per unit to $120

D

See the step by step solution

Step by Step Solution

Step 1: Definition of Fixed Cost

The cost that does not get affected by the level of activity achieved by the business entity is known as a fixed cost. Such cost remains fixed until the capacity is increased by capital expenditure.

Step 2: Total fixed cost to $190,000

An increase in fixed cost will increase the break-even in units because more units will be required to cover the increased fixed cost.

Step 3: Variable cost to $34 per unit

A decrease in variable cost will reduce the break-even units because more of the selling price will be available to cover the fixed cost after adjusting the variable cost.

Step 4: Selling price per unit to $80

A reduction in selling price will increase the break-even units because it will reduce the per-unit contribution margin, and higher sales in units will be required to cover the fixed cost.

Step 5: Variable cost to $67 per unit

An increase in variable cost will increase the break-even in units because the contribution margin per unit will reduce.

Step 6: Total fixed cost to $150,000

Reducing fixed costs to $150,000 will decrease the break-even in units because the lower fixed cost can be covered by selling lower units.

Step 7: Selling price per unit to $120

An increase in selling price will increase the contribution margin per unit. Therefore, the business entity will be able to cover the fixed cost by selling lower units, and therefore break-even in units will reduce.

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