Question

Firm X is selling a vehicle with an MSRP of $30,000 and dealer discount of 10%. Unit cost is $20,000 and fixed costs are $1.4 billion. How many units must they sell to break even?

Answer 1

Answer:

Number of vehicles to be sold to reach break-even point is 200,000 unit

Explanation:

Computation of Dealer’s Discount:

Dealer  Discount = MSRP * Rate of Discount

=$30,000×10%

=$3,000

Computation of net selling Price:  

Net Selling Price = MSRP - Dealer ′ s Discount

=$30,000 - $3,000

=$27,000

Computation of Contribution Margin:  

Contribution Margin = Net Sales - Unit Cost

=$27,000 - $20,000

=$7,000

Compute the number of units to reach break-even point for Firm X.

Break-even point = Fixed cost / Contribution per unit

=$1,400,000,000  / $7,000

=200,000 units

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Therefore, number of vehicles sold to reach break-even point is 200,000.

Nb: MSRP means manufacturer's suggested retail price