Question

Assume a fixed cost of $3,500, a variable cost of $7.25, and a selling price of 12.25.

1. What is the break-even point?
2. How many units must be sold to make a profit of $500,000?
3. How many units must be sold to average $0.75 profit per unit? $1.25 profit per unit? And $1.75 per unit?

Answer 1

a. Contribution margin per unit = Selling price per unit - Variable cost per unit.

= $12.25 - $7.25

= $5

Break-even point = Fixed cost / Contribution margin per unit

= $3,500 / $5

= 700 units

b. Units to be sold = (Fixed cost + Desired profit) / Contribution margin per unit

= ($3,500 + $500,000) / $5

= 100,700

c. Sales - Variable cost - Fixed cost = Profit

(Units * $12.25) - (Units * $7.25) - $3,500 = (Units * $0.75)

(Units * $4.25) = $3,500

Units = 824

(Units * $12.25) - (Units * $7.25) - $3,500 = (Units * $1.25)

(Units * $3.75) = $3,500

Units = 933

(Units * $12.25) - (Units * $7.25) - $3,500 = (Units * $1.75)

(Units * $3.25) = $3,500

Units = 1,077