5. The new CM ratio would be:
Selling price ... $25 100%
Less variable expenses... 9* 36
Contribution margin... $16 64%
*$15 – ($15 × 40%) = $9
The new break-even point would be:
Sales = Variable expenses + Fixed expenses + Profits
$25Q = $9Q + $420,000 + $0
$16Q = $420,000
Q = $420,000 ÷ $16 per ball
Q = 26,250 balls
Alternative solution:
Fixed expenses
Break-even point= in unit sales Unit contribution margin
$420,000
= =26,250 balls
$16 per ball
Although this new break-even is greater than the company’s present
break-even of 21,000 balls [see Part (1) above], it is less than the break-
even point will be if the company does not automate and variable labor
Problem 6-24 (continued)
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