Highway 55 studios has budgeted the following amounts for its next fiscal year: total fixed expenses $ 1 comma 980 comma 000 selling price per unit $ 70 variable expenses per unit $ 10 if highway 55 studios can reduce fixed expenses by $ 49 comma 500, by how much can variable expenses per unit increase and still allow the company to maintain the original breakeven sales in units?

Contribution per unit = Selling price - Unit variable cost

                                     = $70 - $10 = $60

Break-even sales in units = Fixed cost

                                             Contribution per unit

                                         = $1,980,000

                                                   $60

                                        = 33,000 units

If fixed cost reduced by $49,500, new fixed cost will be $1.930,500

33,000     = $1,930,500

                      $70 - VC

33,000(70 - VC) = $1,930,500

2,310,000 - 33,000VC  = $1,930,500

2,310,000 - $1,930,500 = 33,000VC                                          

379,500  = 33,000VC

379,500  = VC

33,000

VC = $11.50

Increase in variable expenses per unit

= $11.50 - $10 = $1.50

Explanation:

In this case, we need to determine the break-even point in units, which is fixed cost divided by variable expenses per unit. If total fixed expenses reduced by $49,500, the new total fixed expenses will be $1,930,500. Then, we will equate the break-even point in units to the new fixed cost divided by contribution per unit, which is selling price minus variable expenses per unit. Since break-even point in units, new fixed cost and selling price were known with the exception of variable cost, variable cost becomes the subject of the formula. The old variable expenses will be deducted from the new variable expenses so as to obtain increase in variable expenses per unit.

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