Chester has negotiated a new labor contract for the next round that will affect the cost for their product Camp. Labor costs will go from $3.79 to $4.39 per unit. Assume all period and other variable costs remain the same. If Chester were to absorb the new labor costs without passing them on in the form of higher prices, how many units of product Camp would need to be sold next round to break even on the product?

Complete Question:

Chester has been selling widgets for $10, total variable costs are $4.40 and fixed costs are $100,000.

Chester has negotiated a new labor contract for the next round that will affect the cost for their product Cid. Labor costs will go from $2.79 to $3.39 per unit. Assume all period and other variable costs remain the same.

If Chester were to absorb the new labor costs without passing them on in the form of higher prices, how many units of product Cid would need to be sold next round to break even on the product?

Chester

Break-even point = Fixed costs/Contribution margin per unit

= $100,000 / $5

= 20,000 units

Explanation:

a) Data and Calculations:

Selling price = $10

Old variable cost = $4.40

Additional variable cost = $0.60

New variable costs = $5 ($4.40 + $0.60)

Contribution per unit = Selling price minus variable cost per unit

= $5 ($10 - $5)

Fixed costs = $100,000

b) Chester's Break-even point (in units) is the number of units of a product  Camp that Chester requires to sell in order to recover her fixed costs.  The information provided by break-even analysis guides Chester in making decisions for the production of Camps and its marketing.  Without identifying the units of Camp to be produced and sold in order to remain in business, all things being equal, Chester might short-produce or short-sell Camps and run the business unprofitably.

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