Question

For a product, manufacturing costs have been estimated at $ 300,000 in fixed costs per year and $ 5 per unit in variable costs. The sale price will be $ 7 / unit and the plant is presumed to have a capacity to produce 200,000 units per year. Determine what percent of the capacity the plant must operate to avoid losing or winning if we assume that each unit produced can be sold.

a.
70%

b. 75%

c.
60%

d.
65%

e.
55%

Answer 1

Answer:

Break even point ( in units ) = Fixed cost / contribution per unit

Given, Fixed costs = $3,00,000

Contribution per unit = selling price per unit - variable cost per unit  

= $7 - $5 = $2

Hence, break even units = $3,00,000/$2 = 1,50,000 units

Therefore, if the entity is able to produce 1,50,000 units,then there would be no profit or loss.

Activity level at which break even happens is: number of units to be produced/total manufacturing capacity

= 1,50,000/2,00,000*100 = 75%.

At 75% capacity level,there would be no profit or loss to the entity.

hence, the option is B.