Question:
Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit.
a. Compute the break-even point.
b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new break-even point?
c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?