Question

The Motor Works is considering an expansion project with estimated fixed costs of $87,000, depreciation of $22,900, variable costs per unit of $22.37, and an estimated sales price of $28.50 per unit. How many units must the firm sell to breakeven on a cash basis?

Answer 1

Answer:

Break Even in Units 142,193

Explanation:

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

28.5 - 22.37 = 6.13

This is the margin per unit to afford the fixed cost and generate a profit

Monetary Fixed cost:

87,000

Depreciation is a non-monetary concept, we are asked for a cash basis so we don't include it.

I'm assuming the 87,000 fixed cost do not include the depreciation so it will be ignored.

If the fixed cost include the depreciation then we should subtract depreciation and calculate with the answer.

$\frac{Fixed\:Cost}{Contribution \:Margin} = Break\: Even\: Point_{units}$

87,000/6.13 = 142,192.50 = 142,193