FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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**Forrester Company Equipment Purchase Analysis**

Forrester Company is considering investing in new equipment that will affect their cost structure. The specifics of the changes are as follows:

- **Fixed Costs**: Will increase from $120,000 to $150,000 per month.
- **Variable Costs**: Will decrease from $70 per unit to $60 per unit.
- **Selling Price**: Remains unchanged at $100 per unit.

Forrester's current break-even analysis reveals:
- **Break-even Sales**: $400,000
- **Current Break-even Units**: 4,000 units

Given these changes, Forrester will need to re-calculate their break-even point in units to determine the revised value after purchasing the new equipment.

**Break-even Analysis Question:**

If Forrester purchases this new equipment, the revised break-even point in units would:

- Increase by 250.
- Decrease by 250.
- Increase by 12,000.
- Decrease by 8,000.
- Increase by 8,000.

**Multiple Choice Options:**

- Increase by 250.
- Decrease by 250.
- Increase by 12,000.
- Decrease by 8,000.
- Increase by 8,000.
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Transcribed Image Text:**Forrester Company Equipment Purchase Analysis** Forrester Company is considering investing in new equipment that will affect their cost structure. The specifics of the changes are as follows: - **Fixed Costs**: Will increase from $120,000 to $150,000 per month. - **Variable Costs**: Will decrease from $70 per unit to $60 per unit. - **Selling Price**: Remains unchanged at $100 per unit. Forrester's current break-even analysis reveals: - **Break-even Sales**: $400,000 - **Current Break-even Units**: 4,000 units Given these changes, Forrester will need to re-calculate their break-even point in units to determine the revised value after purchasing the new equipment. **Break-even Analysis Question:** If Forrester purchases this new equipment, the revised break-even point in units would: - Increase by 250. - Decrease by 250. - Increase by 12,000. - Decrease by 8,000. - Increase by 8,000. **Multiple Choice Options:** - Increase by 250. - Decrease by 250. - Increase by 12,000. - Decrease by 8,000. - Increase by 8,000.
### Break-Even Point Calculation Using Weighted-Average Contribution Margin

**Problem Statement:**

Helpful Hardware sells windows (80% of sales) and doors (20% of sales). The selling price of each window is $400 and of each door is $1,000. The variable cost of each window is $250 and of each door is $700. Fixed costs are $1,440,000. The break-even point in units using the weighted-average contribution margin is:

**Multiple Choice:**

- ⃝  3,200 units
- ⃝  8,000 units
- ⃝  12,000 units
- ⃝  6,858 units
- ⃝  5,334 units

#### Explanation:

To determine the break-even point using the weighted-average contribution margin, follow these steps:

1. **Calculate the Contribution Margin for Each Product:**
   - Contribution margin per window = Selling price per window - Variable cost per window
     \[ \text{CM (window)} = \$400 - \$250 = \$150 \]
   - Contribution margin per door = Selling price per door - Variable cost per door
     \[ \text{CM (door)} = \$1,000 - \$700 = \$300 \]

2. **Determine the Sales Mix:**
   - For windows (80%)
   - For doors (20%)

3. **Calculate the Weighted-Average Contribution Margin:**
   \[ \text{WACM} = (\text{CM (window)} \times \text{Sales mix (window)}) + (\text{CM (door)} \times \text{Sales mix (door)}) \]

   Plugging in the values:
   \[ \text{WACM} = (\$150 \times 0.80) + (\$300 \times 0.20) \]
   \[ \text{WACM} = \$120 + \$60 = \$180 \]

4. **Calculate the Break-Even Point in Units:**
   \[ \text{Break-even units} = \frac{\text{Fixed costs}}{\text{WACM}} \]

   Given:
   \[ \text{Fixed costs} = \$1,440,000 \]
   \[ \text{WACM} = \$180 \]

   \[ \text{Break-even units}
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Transcribed Image Text:### Break-Even Point Calculation Using Weighted-Average Contribution Margin **Problem Statement:** Helpful Hardware sells windows (80% of sales) and doors (20% of sales). The selling price of each window is $400 and of each door is $1,000. The variable cost of each window is $250 and of each door is $700. Fixed costs are $1,440,000. The break-even point in units using the weighted-average contribution margin is: **Multiple Choice:** - ⃝ 3,200 units - ⃝ 8,000 units - ⃝ 12,000 units - ⃝ 6,858 units - ⃝ 5,334 units #### Explanation: To determine the break-even point using the weighted-average contribution margin, follow these steps: 1. **Calculate the Contribution Margin for Each Product:** - Contribution margin per window = Selling price per window - Variable cost per window \[ \text{CM (window)} = \$400 - \$250 = \$150 \] - Contribution margin per door = Selling price per door - Variable cost per door \[ \text{CM (door)} = \$1,000 - \$700 = \$300 \] 2. **Determine the Sales Mix:** - For windows (80%) - For doors (20%) 3. **Calculate the Weighted-Average Contribution Margin:** \[ \text{WACM} = (\text{CM (window)} \times \text{Sales mix (window)}) + (\text{CM (door)} \times \text{Sales mix (door)}) \] Plugging in the values: \[ \text{WACM} = (\$150 \times 0.80) + (\$300 \times 0.20) \] \[ \text{WACM} = \$120 + \$60 = \$180 \] 4. **Calculate the Break-Even Point in Units:** \[ \text{Break-even units} = \frac{\text{Fixed costs}}{\text{WACM}} \] Given: \[ \text{Fixed costs} = \$1,440,000 \] \[ \text{WACM} = \$180 \] \[ \text{Break-even units}
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