Questions: Exercise 6-4 (Static) Break-Even Analysis [LO6-4] 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: 1. Calculate the company's break-even point in unit sales. 2. Calculate the company's break-even point in dollar sales. 3. If the company's fixed expenses increase by 600, what would become the new break-even point in unit sales? In dollar sales?

Exercise 6-4 (Static) Break-Even Analysis [LO6-4]

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

Transcript text: Exercise 6-4 (Static) Break-Even Analysis [LO6-4] 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: 1. Calculate the company's break-even point in unit sales. 2. Calculate the company's break-even point in dollar sales. 3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales?

Solution

Solution Steps

To solve the given problem, we need to perform the following steps:

Calculate the break-even point in unit sales by dividing the total fixed expenses by the contribution margin per unit (selling price per unit minus variable expense per unit).
Calculate the break-even point in dollar sales by multiplying the break-even point in unit sales by the selling price per unit.
Adjust the fixed expenses by adding the increase and then recalculate the break-even points in unit sales and dollar sales using the same formulas as above.

Step 1: Calculate the Contribution Margin per Unit

The contribution margin per unit is calculated as the selling price per unit minus the variable expense per unit: \[ \text{Contribution Margin per Unit} = \$15 - \$12 = \$3 \]

Step 2: Calculate the Break-Even Point in Unit Sales

The break-even point in unit sales is calculated by dividing the total fixed expenses by the contribution margin per unit: \[ \text{Break-Even Units} = \frac{\$4200}{\$3} = 1400 \text{ units} \]

Step 3: Calculate the Break-Even Point in Dollar Sales

The break-even point in dollar sales is calculated by multiplying the break-even point in unit sales by the selling price per unit: \[ \text{Break-Even Dollars} = 1400 \text{ units} \times \$15 = \$21000 \]

Step 4: Adjust Fixed Expenses and Recalculate Break-Even Points

If the fixed expenses increase by \$600, the new fixed expenses become: \[ \text{New Fixed Expenses} = \$4200 + \$600 = \$4800 \]

Step 5: Calculate the New Break-Even Point in Unit Sales

The new break-even point in unit sales is calculated by dividing the new fixed expenses by the contribution margin per unit: \[ \text{New Break-Even Units} = \frac{\$4800}{\$3} = 1600 \text{ units} \]

Step 6: Calculate the New Break-Even Point in Dollar Sales

The new break-even point in dollar sales is calculated by multiplying the new break-even point in unit sales by the selling price per unit: \[ \text{New Break-Even Dollars} = 1600 \text{ units} \times \$15 = \$24000 \]