A company produces a product with a variable cost of $25 and a selling price of
Practice Questions
Q1
A company produces a product with a variable cost of $25 and a selling price of $50. If the company wants to achieve a profit of $15,000 with fixed costs of $30,000, how many units must be sold?
1,000
800
600
1,200
Questions & Step-by-Step Solutions
A company produces a product with a variable cost of $25 and a selling price of $50. If the company wants to achieve a profit of $15,000 with fixed costs of $30,000, how many units must be sold?
Step 1: Identify the variable cost per unit, which is $25.
Step 2: Identify the selling price per unit, which is $50.
Step 3: Calculate the contribution margin per unit by subtracting the variable cost from the selling price: $50 - $25 = $25.
Step 4: Identify the fixed costs, which are $30,000.
Step 5: Identify the target profit, which is $15,000.
Step 6: Add the fixed costs and the target profit together: $30,000 + $15,000 = $45,000.
Step 7: Divide the total amount from Step 6 by the contribution margin per unit from Step 3: $45,000 / $25 = 1,800.
Step 8: The result from Step 7 is the number of units that must be sold to achieve the target profit.
Break-even Analysis – Understanding how to calculate the number of units needed to cover fixed costs and achieve a target profit.
Contribution Margin – The difference between the selling price and variable cost, which contributes to covering fixed costs and generating profit.
