Shawn Penn Pencil Sets, Inc has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce variable costs per unit to $2.00 As a result of Bic's suggestion, will the break-even point go up or down? Compute the necessary number Solution: Shawn penn Pencil sets. Inc $80,000$80.000 BE(before) 32000 units $500-$250$2.50 $120000$120.000 BE(after)= 40.000 units $5.00-$2.00$3.00 The break-even point will go up 5-6. Gibson Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expend itures related to fixed costs. Its total fixed costs are $1,200,000, but 25 percent of this value is represented by depreciation Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point? Solution: Gibson sons Cash related fixed costs= Total Fixed Costs-Depreciation =$1,200,000-25%($1,200,000 $1,200,000-$300,000 $900,000 $900000 BE 375. units 240 S-165 Copyright o by The McGraw-Hill Companies. InCopyright © 2005 by The McGraw-Hill Companies, Inc. S-165 5-5. Shawn Penn & Pencil Sets, Inc. has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce variable costs per unit to $2.00. As a result of Bic's suggestion, will the break-even point go up or down? Compute the necessary numbers. Solution: Shawn Penn & Pencil Sets, Inc. 40,000 units $3.00 $120,000 $5.00 $2.00 $120,000 BE (after) 32,000 units $2.50 $80,000 $5.00 $2.50 $80,000 BE (before) = = − = = = − = The break-even point will go up. 5-6. Gibson & Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $1,200,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point? Solution: Gibson & Sons Cash related fixed costs = Total Fixed Costs – Depreciation = $1,200,000 – 25% ($1,200,000) = $1,200,000 – $300,000 = $900,000 375,000 units $2.40 $900,000 BE = =