Question

Senbet Ventures is considering starting a new company to produce stereos. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business

Answer 1

Answer:

Sales volume required to break even = 96,000 units

Explanation:

Break-even Unit Sales = $\frac{Fixed Costs+Target Income}{Contribution margin/unit}$

where:

Fixed costs = $120,000

Target income = $0 (company wants EBIT of zero)

Contribution margin/unit=Sales price/unit- Variable Costs/unit=$(1.5*2.5)-2.5=3.75-2.5 = 1.25/unit$

Break-even Unit Sales = $\frac{120,000}{1.25}=96,000 units$