Question

Street Company's fixed expenses total $150,000, its variable expense ratio is 60% and its variable expenses are $4.50 per unit. Based on this information, the break-even point in units:

Answer 1

Answer:

Break even in units = 50000 units

Explanation:

Break even point is a point where total revenues equal total cost and the firm makes no profit or no loss. Break even point in units is the number of units that must be sold in order for the firm to break even. The formula to calculate break even in units is,

Break even in units = Fixed costs / Contribution margin per unit

Where,

Contribution margin per unit = Selling price per unit - Variable cost per unit

First we will calculate the contribution margin per unit.

A variable cost ratio of 60% means that variable costs are 60% of selling price. This means that the remaining 40% is contribution margin per unit.

Now if the variable cost is 4.5 per unit which are 60% of selling price, the the selling price per unit will be,

4.5 = 0.6 / Selling price

Selling price = 4.5 / 0.6

Selling price = 7.5 per unit

Contribution margin per unit = 7.5 - 4.5 = 3 per unit

Break even in units = 150000 / 3

Break even in units = 50000 units