The Widget Company's total sales are forecasted to be $950,000. Fixed costs are $300,000 and the product sells for $310. The variable costs per unil are $238. Should the Chocolate Company shut down operations? (Assume that fixed costs will continue for the short term).
A.They should stay open even though they are operating at a loss as long as they cover some of the foxed costs.
B.They will be profitable so they should remain open even though the profit was less than forecast.
C.They should close because they are not making any money.
D.They should close because the volume forecast was not accurate.
HINT: The answer B & C are wrong
| CM per unit: | ||||||||||
| Selling price | 310 | |||||||||
| less: VC per unit | 238 | |||||||||
| CM per unit | 72 | |||||||||
| CM per unit = CM per unit / Selling price *100 | ||||||||||
| 72 / 310 *100 = 23.23% | ||||||||||
| Break even In $: | ||||||||||
| Fixed cost | 300000 | |||||||||
| Divide: CM ratio | 23.23% | |||||||||
| Break even sales | 1291433 | |||||||||
| Answer is A. They should stay open even though they are operating at loss as they cover some of the fixed cost | ||||||||||
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