Question

1. Break-even analysis To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Free Spirit Industries Inc.: Free Spirit Industries Inc. is considering a project that will have fixed costs of $15,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $12.80 per unit. Given Free Spirit’s cost structure, it will have to sell

Answer 1

Answer:

Results are below.

Explanation:

Giving the following information:

Fixed costs= $15,000,000

Selling price= $37.5

Unitary variable cost= $12.8

To calculate the break-even point in units and dollars, we need to use the following formula:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 15,000,000 / (37.5 - 12.8)

Break-even point in units= 607,287 units

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 15,000,000 / (24.7/37.5)

Break-even point (dollars)= $22,773,279.35