Lightfoot Company sells its product for $55 and has variable costs of $30 per unit. Total fixed costs are $25,000. What will be the effect on the breakeven point if variable costs increase by 10% due to an increase in the cost of direct materials?
A) It will increase by 136 units.
B) It will increase by 242 units.
C) It will decrease by 136 units.
D) It will decrease by 242 units.

Question

Quizplus · Accepted Answer

The original variable cost is $30, and a 10% increase makes it $33. The contribution margin per unit changes from $25 ($55 - $30) to $22 ($55 - $33). The breakeven point in units is calculated as fixed costs divided by the contribution margin per unit. Originally, it was 1,000 units ($25,000 / $25), and with the increased variable cost, it becomes approximately 1,136 units ($25,000 / $22). Thus, the breakeven point increases by 136 units.

Lightfoot Company Sells Its Product for $55 and Has Variable