Question

ABC Inc. Manufactures biotech sunglasses. The variable materials cost $1.43 per unit and the variable labour cost is $2.44 per unit.

1. What is the variable cost per unit? ($3.87)
2. Suppose the firm incurs fixed costs of $650,000 during a year in which total production is 320,000 units. What are the total costs for the year? ($1,888,400)
3. If the selling price is $10 per unit, what is the cash break-even point? If depreciation is $190,000 per year, what is the accounting break-even point? (106,036 units; 137,031 units)

Answer 1

a)

Variable cost per unit = Variable material cost + variable labour cost

Variable cost per unit = $1.43 + $2.44

Variable cost per unit = $3.87

b)

Total variable cost = Variable cost per unit * units

Total variable cost = $3.87 * 320,000

Total variable cost = $1,238,400

Total costs = Total variable costs + total fixed costs

Total costs = $1,238,400 + $650,000

Total costs = $1,888,400

c)

Cash break even point = Fixed costs / price - variable costs

Cash break even point = $650,000 / 10 - 3.87

Cash break even point = 106,036 units

Accounting break even point = (fixed costs + depreciation) / price - variable

Accounting break even point = (650,000 + 190,000) / 10 - 3.87

Accounting break even point = 840,000 / 6.13

Accounting break even point = 137,031 units