Using data from the business in Exercise 1, in its second year of operation, it adds a second selling facility, which increases the fixed cost by $250,000. The variable cost has now decreased by $2.50 per unit. What is the new selling price to break even?

Answer to exercise 1

At break-even point, Total cost Total Revenue => Total Variable cost + Total Fixed cost-Total Revenue => 20*q+750,000 = Sprq (SP-break even selling price,q- break even quantity) =>SP= (20*q+750,000)/q =>SP-20+750,000/q is the equation that satisfies the break even selling price at q-500, SP=20+750,000/500-1520 therefore the break even selling price is S 1520 that occurs at break even quantity of 500