Widgets R Us would like to offer a special product to its best customers. Howeve

Question

Widgets R Us would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project. The fixed costs are estimated at $22,000, the depreciation expense is $13,000, and the contribution margin per unit is $13.50. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level? (That is the cash breakeven amount of units). Show all work

Explanation / Answer

Here we assume the Depreciation expenses are included in the Fixed Cost Now

Answer : - Cash BEP = (Fixed Cost - Non cash exps.) / contribution p.u

Now Deduct the non cash expenses from the fixed cost = 22000 - 13000 = 9000

Now Cash BEP = 9000 / 13.5 = 666.66 = 667 units

The minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level is 667 units

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