ITPEC FE Morning April 2023 Question 79
A company plans to provide a product with a fixed cost of $128,000, a variable cost per unit of $48, and a selling price per unit of $80. Which of the following is the point of sales (in dollars) to become break-even?
Explanation
320,000 dollars — divide the fixed cost by the contribution margin ratio.
- •Contribution margin per unit: 80 − 48 = 32 dollars
- •Contribution margin ratio: 32 ÷ 80 = 0.4
- •Break-even sales: 128,000 ÷ 0.4 = 320,000 dollars
Check: 320,000 dollars is 320,000 ÷ 80 = 4,000 units, whose contribution 4,000 × 32 = 128,000 dollars exactly covers the fixed cost.
Answer (b)
Why not others:
- •(a) 240,000 — 3,000 units contribute 96,000 dollars, 32,000 short of the fixed cost, so the product still makes a loss
- •(c) 480,000 — 6,000 units contribute 192,000 dollars, already a profit of 64,000 dollars
- •(d) 560,000 — 7,000 units give a profit of 96,000 dollars, well past break-even
Key rule: Break-even sales = fixed cost ÷ (1 − variable cost ÷ price); break-even units = fixed cost ÷ (price − variable cost per unit).
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