Question

Outdoor Gourmet Inc. sells gas grills for $275 each. The contribution margin ratio is 40%. If Outdoor Gourmet needs to sell 12,000 units to break even, then the firm’s fixed costs are
A : $1,980,000.
B : $1,320,000.
C : $2,240,000.
D : $3,300,000.

Answer 1

Answer:

B : $1,320,000.

Explanation:

First, calculate variable cost per unit using Contribution margin(CM) ratio;

CM ratio 0.40= (Sales-total variable cost) / sales

Sales= 275*12000= 3,300,000

0.40= (3,300,000-VC)/ 3,300,000

Multiply both sides by 3,300,000 to get;

(0.40 * 3,300,000)=3,300,000-VC

1,320,000=3,300,000-VC

VC=3,300,000-1,320,000

VC= $1,980,000; meaning VC per unit = 1980000/12000= $165

Next, use Breakeven formula to calculate Fixed Costs(FC);

Breakeven (BE) = Fixed cost/ (Price-VC)

12000=FC/(275-165)

12000=FC/ 110

Multiply both sides by 110

12,000 * 110 = FC

Fixed Costs = $1,320,000