Question

Mauro Products sells a woven basket for $15 per unit. Its variable expense is $12 per unit and the company’s monthly fixed expense is $4,200.

Required:
Calculate the company’s break-even point in unit sales.
Calculate the company’s break-even point in dollar sales.
If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales?

Answer 1

To calculate the break-even point in unit sales, we need to use the formula:

\[
\text{Break-even point (units)} = \frac{\text{Fixed Expenses}}{\text{Selling Price per Unit} - \text{Variable Expense per Unit}}
\]

### 1. Calculation of initial break-even point:

Given:
- Selling Price per Unit = $15
- Variable Expense per Unit = $12
- Monthly Fixed Expenses = $4,200

First, we calculate the contribution margin per unit:

\[
\text{Contribution Margin per Unit} = \text{Selling Price per Unit} - \text{Variable Expense per Unit} = 15 - 12 = 3
\]

Now, we can calculate the break-even point in units:

\[
\text{Break-even point (units)} = \frac{4,200}{3} = 1,400 \text{ units}
\]

### 2. Calculation of break-even point in dollar sales:

To find the break-even point in dollar sales, we can multiply the break-even point in units by the selling price per unit:

\[
\text{Break-even point (dollars)} = \text{Break-even point (units)} \times \text{Selling Price per Unit}
\]

\[
\text{Break-even point (dollars)} = 1,400 \times 15 = 21,000 \text{ dollars}
\]

### 3. New break-even point after increase in fixed expenses:

If the fixed expenses increase by $600, the new fixed expenses would be:

\[
\text{New Fixed Expenses} = 4,200 + 600 = 4,800
\]

Now we can calculate the new break-even point in units:

\[
\text{New Break-even point (units)} = \frac{4,800}{3} = 1,600 \text{ units}
\]

### 4. New break-even point in dollar sales:

We can also find the new break-even point in dollar sales:

\[
\text{New Break-even point (dollars)} = \text{New Break-even point (units)} \times \text{Selling Price per Unit}
\]

\[
\text{New Break-even point (dollars)} = 1,600 \times 15 = 24,000 \text{ dollars}
\]

### Summary of Results:

- Initial break-even point in unit sales: **1,400 units**
- Initial break-even point in dollar sales: **$21,000**
- New break-even point in unit sales (after expense increase): **1,600 units**
- New break-even point in dollar sales (after expense increase): **$24,000**