Question

A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, or $500, and fixed costs are estimated at $350,000. The investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the break-even formula, but include the required profit in the numerator.)

Answer 1

Sales volume = 3,400 units

Explanation;

Sales volume would be required in order to meet the minimum profit goal will be calculated as follow;

Sale price per unit = $500

Variable cost per unit = $250

Fixed costs = $350,000

Minimum desired profit = $500,000

Formula for calculating sales volume is as follow;

Sales volume = Fixed costs + Desired profit / (Sale price – Variable cost)

Now, let’s put the values in above given formula;

Sales volume = $350,000 + $500,000 / $500 – $250

= $850,000 / $250

= 3,400 units