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A business has fixed costs of $20,000 and variable costs of $5 per unit. If the

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Question: A business has fixed costs of $20,000 and variable costs of $5 per unit. If the selling price is $15 per unit, how many units must be sold to break even?

Options:

  1. 2,000 units
  2. 1,000 units
  3. 4,000 units
  4. 3,000 units

Correct Answer: 2,000 units

Solution: 

Break-even point = Fixed Costs / (Selling Price - Variable Cost) = 20,000 / (15 - 5) = 2,000 units.

A business has fixed costs of $20,000 and variable costs of $5 per unit. If the

Practice Questions

Q1
A business has fixed costs of $20,000 and variable costs of $5 per unit. If the selling price is $15 per unit, how many units must be sold to break even?
  1. 2,000 units
  2. 1,000 units
  3. 4,000 units
  4. 3,000 units

Questions & Step-by-Step Solutions

A business has fixed costs of $20,000 and variable costs of $5 per unit. If the selling price is $15 per unit, how many units must be sold to break even?
  • Step 1: Identify the fixed costs. In this case, the fixed costs are $20,000.
  • Step 2: Identify the variable cost per unit. Here, the variable cost is $5 per unit.
  • Step 3: Identify the selling price per unit. The selling price is $15 per unit.
  • Step 4: Calculate the contribution margin per unit. This is done by subtracting the variable cost from the selling price: 15 - 5 = $10.
  • Step 5: Use the break-even formula. The formula is: Break-even point = Fixed Costs / Contribution Margin.
  • Step 6: Plug in the numbers: Break-even point = 20,000 / 10.
  • Step 7: Calculate the break-even point: 20,000 divided by 10 equals 2,000 units.
  • Break-even Analysis – This concept involves calculating the point at which total revenues equal total costs, meaning no profit or loss occurs.
  • Fixed and Variable Costs – Understanding the difference between fixed costs (costs that do not change with the level of output) and variable costs (costs that vary directly with the level of output) is crucial for this calculation.
  • Contribution Margin – The contribution margin is the difference between the selling price per unit and the variable cost per unit, which is used to determine how much each unit sold contributes to covering fixed costs.
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