Forrester Company is considering buying new equipment that w

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $432,000 to $450,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $120 is not expected to change. Forrester\'s current break-even sales are $1,080,000 and current break-even units are 9,000. If Forrester purchases this new equipment, the revised break-even point in dollars would be:

$864,000

$1,080,000

$900,000

$1,260,000

$450,000

Solution

Calculation of Revised Break-even Point

Break-even Point (in units) = Fixed Cost/(Selling Price - Variable Cost)

= $450,000/($120 - $60)

= $450,000/$60

= 7500 units

Break-even Point (in Value) = Break-even Point X Selling Price

= 7500 X $120

= $900,000

Therefore Option C is Correct, i.e. $900,000