Chapter 5, Problem 6P

Shawn Pen & Pencil Sets Inc. has fixed costs of $\text{\$80,000}$ . Its product currently sells for $\text{\$5}$ per unit and has variable costs of $\text{\$2}\text{.50}$ per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $\text{\$400,000}$ and drive up fixed costs to $\text{\$120,000}$ . Although the price will remain at $\text{\$5}$ per unit, the increased automation will reduce costs per unit to $\text{\$2}\text{.00}$ .

As a result of Bic’s suggestion, will the break-even point go up or down? Compute the necessary numbers.