Angel Corporation produces calculators selling for $25.99. Its unit cost is $18.95. Assuming a fixed cost of $80,960, what is the breakeven point in units?
The correct answer and explanation is:
To calculate the breakeven point in units, we use the formula: Breakeven Point (units)=Fixed CostsSelling Price per Unit−Variable Cost per Unit\text{Breakeven Point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}}
Step-by-Step Calculation:
- Selling Price per Unit = $25.99
- Variable Cost per Unit = $18.95
- Fixed Costs = $80,960
Now, plug these values into the formula: Breakeven Point=80,96025.99−18.95=80,9607.04\text{Breakeven Point} = \frac{80,960}{25.99 – 18.95} = \frac{80,960}{7.04} Breakeven Point=11,488.64\text{Breakeven Point} = 11,488.64
Since the number of units cannot be a fraction, we round this up to the nearest whole number, which is 11,489 units.
Explanation:
The breakeven point represents the number of units a company needs to sell to cover all of its fixed and variable costs, meaning that at this point, the company is neither making a profit nor incurring a loss.
- The selling price per unit is the amount of money Angel Corporation receives for each calculator sold.
- The variable cost per unit is the cost incurred for producing each calculator, including materials, labor, and other direct costs that vary with production volume.
- The fixed costs represent the total expenses that remain constant regardless of the number of calculators produced, such as rent, salaries, and utilities.
By calculating the breakeven point, Angel Corporation can determine how many calculators it needs to sell to start making a profit. The formula subtracts the variable cost from the selling price to find the contribution margin per unit, which is the amount each unit contributes toward covering fixed costs. Once the fixed costs are fully covered, any additional sales will contribute directly to profit.