Question

A company intends to sell a product to retailers, who are expected to sell it to consumers for $10.00. Retailers take a 15% margin. The company has unit variable costs of $2.50, and fixed costs total $240,000. What must its unit and dollar sales be to break even? How many units must it sell to earn a 20% return on its investment of $300,000?

Answer 1

For the company, relevant selling price is the price at which it is sold at retailers, i.e. $10.

(i) Break-even quantity = Fixed cost / (Price - Unit variable cost) = $240,000 / $(10 - 2.5) = $240,000 / $7.5 = 32,000

(ii) Break-even (sales) = Break-even quantity x Price = 32,000 x $10 = $320,000

(iii) Target profit = $300,000 x 20$ = $60,000

Break-even quantity = (Fixed cost + Profit) / (Price - Unit variable cost) = $(240,000 + 60,000) / $7.5 = 300,000 / 7.5 = 40,000