It is very important for a manufacturer to know the unit price, unit cost, and fixed costs of each product they make. This information helps them to determine how many units they have to sell to break even or to make a profit.
The following practice questions ask you to calculate the sales requirements both to make a profit and to break even.
Practice questions
Use the following information to answer the questions.
Lake City Products sells its product for $45 per unit. The costs associated with the product consist of $30 per unit of variable cost and $150,000 of fixed costs.
How many units must the company sell to earn $1,000,000?
How many units must the company sell to reach its break-even point?
Answers and explanations
76,667
The company must sell enough units so that the total contribution margin covers the fixed costs and produces $1,000,000 in profit. The first step to solve this problem is to calculate the contribution margin per unit. The contribution margin per unit is equal to the selling price less the variable cost per unit.
The second step is to calculate the number of units the company must sell to cover an amount to equal the fixed costs plus the desired profit of $1,000,000.
10,000
The company must sell enough units so that the total contribution margin covers the fixed costs of $150,000. The first step to solve this problem is to calculate the contribution margin per unit. The contribution margin per unit is equal to the selling price less the variable cost per unit.
The second step is to calculate the number of units the company must sell to cover an amount to equal the fixed costs. This number of units will generate a profit of $0.
If you need more practice on this and other topics from your accounting course, visit Dummies.com to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.