Question

Racer Industries has fixed costs of $900,000. The selling price per unit is $250, and the variable cost per unit is $130. a. How many units must Racer sell in order to break even? b. How many units must Racer sell in order to earn a profit of $480,000? c. A new employee suggests that Racer Industries sponsor a 10K marathon as a form of advertising. The cost to sponsor the event is $7,200. How many more units must be sold to cover this cost?

Answer 1

Answer:

a. 7,500 units

b. 11,500 units

c. 60 more units

Explanation:

a. The formula to compute the break even point is shown below:

= (Fixed expenses ) ÷ (Contribution margin per unit)  

where,  

Contribution margin per unit = Selling price per unit - Variable expense per unit  

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit  

= $250 - $130

= $120

And, the fixed expenses is $900,000  

Now put these values to the above formula  

So, the value would equal to  

= ($900,000) ÷ (120)  

= 7,500 units

b. To earn profit, the computation is shown below:

= (Fixed expenses + desired profit ) ÷ (Contribution margin per unit)  

= ($900,000 + $480,000) ÷ (120)  

= 11,500 units

c. The more units would be

= (Sponsor cost) ÷ (Contribution margin per unit)  

= ($7,200) ÷ (120)  

= 60 units