A company has fixed costs of $20,000 and a contribution margin of $5 per unit. H
Practice Questions
Q1
A company has fixed costs of $20,000 and a contribution margin of $5 per unit. How many units must be sold to break even?
2,000
4,000
1,000
5,000
Questions & Step-by-Step Solutions
A company has fixed costs of $20,000 and a contribution margin of $5 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 contribution margin per unit. Here, the contribution margin is $5 per unit.
Step 3: Use the break-even formula, which is: Break-even point (units) = Fixed costs / Contribution margin per unit.
Step 4: Plug in the numbers: Break-even point (units) = $20,000 / $5.
Step 5: Calculate the result: $20,000 divided by $5 equals 4,000 units.
Step 6: Conclusion: The company must sell 4,000 units to break even.
Break-even Analysis – The process of determining the number of units that must be sold to cover fixed and variable costs.
Fixed Costs – Costs that do not change with the level of production or sales.
Contribution Margin – The amount each unit contributes to covering fixed costs and generating profit, calculated as sales price per unit minus variable costs per unit.
