Would Oleck’s break-even point increase or decrease if it made the change? Calculate old and new break-even points

Incomplete question. The full question read;

Oleck Inc. produces stereo components that sell at P = $100 per unit. Oleck’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Oleck’s assets (all equity financed) are $500,000. Oleck can change its production process by adding $400,000 to assets and $50,000 to fixed operating costs. This change would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000 units, but (3) the sales price on all units would have to be lowered to $95 to permit sales of the additional output. Oleck has tax loss carry-forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%.  

Would Oleck’s break-even point increase or decrease if it made the change? Calculate old and new break-even points  

a) Old break-even point =  units  

b) New break-even point =  units  

c) Increase or decrease?

a) 4,000 units

b) 4,545 units

c) increase

Explanation:

To find the break-even point based on units, we use the formula  = Total Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit).

Old break-even point:

∴ Old break-even point (units) = = 4,000 units

New break-even point:

∴ New break-even point (units) = = 4,545 units

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