ITPEC FE Morning April 2021 Question 79
The break-even point (BEP) is a level where total cost and total revenue are equal. The table below lists the fixed cost, variable cost per unit, price per unit, and BEP in units. Which of the following is a value of the price per unit?
Explanation
$12 — at the break-even point the contribution of every unit sold exactly covers the fixed cost.
BEP in units is fixed cost ÷ (price − variable cost per unit). Rearranging for the contribution per unit:
- •Contribution per unit: 100,000 ÷ 10,000 = 10 dollars
- •Price: 10 + 2 = 12 dollars
- •Check: 100,000 ÷ (12 − 2) = 10,000 units
Answer (c)
Why not others:
- •(b) 8 — subtracts the variable cost from the contribution, 10 − 2, instead of adding it
- •(a) 4 — the contribution would be only 2 dollars per unit, giving a BEP of 50,000 units
- •(d) 16 — the contribution would be 14 dollars per unit, giving a BEP of about 7,143 units
Key rule: Contribution per unit = price − variable cost, and BEP units = fixed cost ÷ contribution; solve for the missing value and check it back in the formula.
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