A company has fixed costs of $900 and a per-unit contribution margin of $3. Whic
ID: 2342823 • Letter: A
Question
A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the following statements is true? ______
A) Once the break-even point is reached; the company will increase income at the rate of $3 per unit.
B) Each unit "contributes" $3 toward covering the fixed costs of $900.
C) Each unit "contributes" $3 toward covering the fixed costs of $900 and once the break-even point is reached, the company will increase income at the rate of $3 per unit.
D) The firm will definitely lose money in this situation.
E) The situation described is not possible and there must be an error.
Explanation / Answer
Answer
Sale price per unit $ 50
Variable cost per unit $ 47
Fixed Costs $ 900
Break Even units will be:
A
Sale price per unit
$ 50.00
B
Variable cost per unit
$ 47.00
C = A - B
Contribution margin per unit
$ 3.00
D
Fixed Cost
$ 900.00
E = D/C
Break Even Level of units
300
Now, lets take a look at Net Income at various level of output sold
Working
No. of units
150
250
300
301
350
A[calculated above]
Contribution margin per unit
$ 3.00
$ 3.00
$ 3.00
$ 3.00
$ 3.00
B = Units x A
Total Contribution margin
$ 450.00
$ 750.00
$ 900.00
$ 903.00
$ 1,050.00
C
Fixed Costs
$ 900.00
$ 900.00
$ 900.00
$ 900.00
$ 900.00
D = B - C
Net Income (Loss)
$ (450.00)
$ (150.00)
$ -
$ 3.00
$ 150.00
E
Increase in Net Income
$ 300.00
$ 150.00
$ 3.00
$ 147.00
F
Increase in Units
100
50
1
49
G = E/F
Increase in Income per unit
$ 3.00
$ 3.00
$ 3.00
$ 3.00
---As you can see, 300 units is Break Even and the Net Income at that level is $ 0. As the unit become 301 units, Net Increase in Net Income is $ 3, which is equal to the Contribution margin per unit.
A
Sale price per unit
$ 50.00
B
Variable cost per unit
$ 47.00
C = A - B
Contribution margin per unit
$ 3.00
D
Fixed Cost
$ 900.00
E = D/C
Break Even Level of units
300
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