Question

A producer with only one product has total fixed costs of $15,000 per month. In addition, it cost the producer $100 in variable costs to produce each unit of her product (raw materials and direct labor cost). The producer charges her wholesalers $125 per unit.
a. How many units of the product does the producer have to sell each month in order to break even?
b. The producer has set a target profit of $3,500 per month for this product. How many units must be sold to break even and achieve the $3,500 per month?

Answer 1

In order to break even, 600 units should be sold.

Also, 740 units have to be sold to break even and achieve the $3,500 per month.

A. First and foremost, we have to calculate the contribution margin per unit and this will be:

= Revenues per unit - Variable costs per unit

= $125 - $100

= $25

Therefore, the break-even units will be:

= Fixed costs / Contribution margin per unit

= $15,000 / $25

= 600 units

Therefore, 600 units have to be sold to breakeven.

B. The units to be sold to attain the target profit will be:

= (Fixed costs + Target profit) / Contribution margin per unit

= ($15,000 + $3,500) / $25

= 740 units

Therefore, 740 units have to be sold.

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