Question

12-3. (Break-even point and selling price) Simple Metal Works, Inc. will manufacture and sell 300,000 units next year. Fixed costs will total $350,000, and variable costs will be 65 percent of sales. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What selling price per unit is necessary to achieve this result

Answer 1

Answer:

Selling price= $5.08

Explanation:

Giving the following information:

Number of units= 300,000

Fixed costs= $350,000

Desired profit= $250,000

Variable cost rate= 0.65

First, we need to calculate the unitary contribution margin using the break-even point formula:

Break-even point in units= (fixed costs + desired profit)/ contribution margin per unit

300,000 = (350,000 + 250,000) /  contribution margin per unit

300,000 contribution margin per unit = 600,000

contribution margin per unit= 600,000/300,000

contribution margin per unit= $2

If the variable cost rate is 0.65, then:

Unitary varaible cost= 2/0.65= $3.08

Selling price= contribution margin per unit - unitary varaible cost

Selling price= 2 - (-3.08)

Selling price= $5.08