Question

Smithson Cutting is opening a new line of scissors for supermarket distribution. It estimates it's fixed cost to be 550.00 and its variable cost to be $0.50 per unit. Selling price is expected to average $0.75 per unit.
a) For smithson cutting, the break even point in units = units (enter as whole number)

b) For smithson cutting, the break even point in dollars = $ units (round to nearest whole number)

c) If smithson cutting produces 600 units, it will:

A. Make a loss

B. Break even

C. Make a profit

Answer 1

Answer:

a. Breakeven in units is 2200 units

b. Break even in  dollars is $1650

c. The answer is A. make a loss

Explanation:

a.

The breakeven points in units is the point or number of units where the total revenue equals total cost and there is no profit or no loss. Below the breakeven quantity, the firm is operating at a loss and above it, it is operating at a profit.

The break even point in unit can be calculated by dividing the fixed costs by the contribution per unit. The formula for break even point in units is:

Breakeven in units = Fixed Costs / contribution per unit

Contribtuion per unit = Selling price per unit - Variable cost per unit

Break even in units = 550 / (0.75 - 0.5)   = 2200 units/scissors

b.

The break even point in dollars is the value of sales at which the company will breakeven and will make no profit and no loss. The break even point in dollars can be calculated by multiplying the break even point in units by the selling price per unit. Alternatively, it can also be calculated by dividing the fixed costs by contribution margin ratio.

Contribution margin ratio = (Selling price - variable cost) / selling price

CM ratio = (0.75 - 0.5) / 0.75 = 0.3333 or 33.33%

Breakeven in dollars = 2200 * 0.75 = $1650

or

Break even in dollars = 550 / ((0.75-0.5) / 0.75)   = $1650

c.

As 600 units is less than the breakeven number of units (2200 units) , it will make a loss.