Question

Eaton Tool Company has fixed costs of \(255,000, sells its units for \)66, and has variable costs of \(36 per unit.

b. Ms. Eaton comes up with a new plan to cut fixed costs to \)200,000. However, more labor will now be required, which will increase variable costs per unit to \(39. The sales price will remain at \)66. What is the new breakeven point?

Short answer

The new break-even point of the company is 7,408 units.

Step-by-step solution

The information given in the question for new plan

Fixed cost: $200,000

Increased variable cost per unit is $39

Sales price per unit is $66

Break-even point

$\begin{array}{rcl}\mathrm{Break}\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\left(\mathrm{Revenue}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}\right)}\\ & =& \frac{\$200,000}{\left(\$66-\$39\right)}\\ & =& 7,407.41\mathrm{units}\approx 48\mathrm{units}\end{array}$