Question

Your product unit costs are expected to be $2.50 per pair. Shipping and delivery costs to retailers are estimated at $1.70 per unit. In addition, you will have to pay commissions of $.30 per unit sold to the sales representatives. You want a “markup” of 50% and your retailers want desired a mark-up before their expenses of 40 percent In addition, you want a salary of $7,000 per month. Other administrative expenses will be $2,500 per month. Find the units needed to be sold to reach breakeven (the units that should cover the fixed expenses).

A 50,667

B 38,475

C 59,660

D 45,818

E 41,475

Answer 1

Production Cost = Unit Costs + shippping and delivery costs + Commission

= $2.5 + $1.70 + $0.30

= $4.5

Mark up Cost = Production Cost * Mark up percentage

= $4.50 * 50%

= $2.25

Selling Price = Production Cost + Mark up cost = $4.5 + $2.25 = $6.75

Contribution Margin = Selling Price - Production Cost

= $6.75 - $4.5

= $2.25

Annual Fixed Costs = (Monthly salar expenses + Other administrative expenses )*12

= ($7,000 + $2,500) * 12

= $114,000

Break even Units sold = Annual Fixed Costs / Contribution Margin

= $114,000 / $2.25

= 50,666.6666667

Therefore, we should sell 50,667 units to be sold to break even

Option A is correct