A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce depreciation expense from $125,000 to $100,000.However, the ratio of variable costs to sales will increase from 68 percent to 80 percent.What will happen to break-even level of revenues?
A)A reduction to the level of $875,000
B)A reduction to the level of $2,890,625
C)An increase to the level of $3,500,000
D)An increase to the level of $3,625,000 Break even = (600,00 + 100,000)/.2

Question

Quizplus · Accepted Answer

The break-even point formula is:

Fixed Costs / (1 - Variable Costs as a % of Sales)

Using the original data, the break-even point is:

$800,000 / (1 - 0.68) = $2,500,000

With the new technology, the fixed costs and depreciation expenses would decrease to $700,000 ($800,000 - $125,000 + $100,000), and the variable costs would increase to 80% of sales. The new break-even point would be:

$700,000 / (1 - 0.80) = $3,500,000

Therefore, the break-even level of revenues would increase to the level of $3,500,000.

A Manufacturer Contemplates a Change in Technology That Would Reduce