Question

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

c. Under the new plan, what is likely to happen to profitability at very high

volume levels (compared to the old plan)?

Short answer

Under the new plan, profitability is more than the old plan until the break even point. Once the break even point is achieved the profitability under the old plan is more than the new plan. It is because the variable cost under old plan is less than the new plan. It means the new plan is more profitable only when the volume is high.

Step-by-step solution

Profit

Profit is the net income of the company. It is computed by deducting the variable and fixed cost from the gross revenue earned by the company.

Profitability under new plan in comparison of old plan

Variable cost under the new plan is more than the old plan. Due to this, after achieving the break-even point, the old plan is more profitable. As it would give more profit than the new plan