Forrester Company is considering buying new equipment that would increase monthl
ID: 2531208 • Letter: F
Question
Forrester Company is considering buying new equipment that would increase monthly fixed costs from $379,500 to $507,000 and would decrease the current variable costs of $75 by $10 per unit. The selling price of $130 is not expected to change. Forrester's current break-even sales are $897,000 and current break-even units are 6,900. If Forrester purchases this new equipment, the revised break-even point in dollars would be:
Multiple Choice
a. $759,000.
b. $897,000.
c. $345,000.
d. $1,035,000.
e. $1,014,000.
Explanation / Answer
Fixed Cost = $ 507,000
Variable Cost =$ 65 Per Unit
Selling Price = $ 130 Per Unit
Hence, Revised Contribution Margin Ratio = (Selling Price -Variable Cost ) / Selling price
= $ 130 - $ 65 / $ 130
= 0.50
Hence the revised break-even point in dollars = Fixed Cost / Revised Contribution Margin Ratio
= $ 507,000 /0.50
= $ 1,014,000
Hence the correct answer is e. $ 1,014,000