Eaton Tool Company has fixed costs of $266, 600, sells its units for $68, and has variable costs of $37 per unit.

a. Compute the break-even point.
b. Ms. Eaton comes up with a new plan to cut fixed costs to $210,000. However, more labor will now be required, which will increase variable costs per unit to $40. The sales price will remain at $68. 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)?

a. Profitability will be less
b. Profitability will be more

The break-even point is the level of sales at which the business incur no profit no loss.Fixed and variable costs are covered at this level of sales. Use following formula of break-even to calculate the fixed cost.

Break-even point = Fixed cost / Contribution margin ratio

Break-even point = $266,600 / ($31 / $68) = $584,800

b.

Contribution Margin = Selling price - variable cost = $68 - $40 = $28

Break-even point = Fixed cost / Contribution margin ratio

Break-even point = $210,000 / ($28 / $68) = $510,000

c.

As the break-even point is decreases it means the cost of associated with the product is decreased because the selling price remains constant. Although there is an increase in the variable cost but reduction in fixed cost has more effect than increase in variable cost.