Question

You are selling a new line of T-shirts on the boardwalk. The selling price will be $25 per shirt. The labor cost is $5 per shirt. The administrative costs of operating the company are estimated to be $60,000 annually, and the sales and marketing expenses are $20,000 a year. Additionally, the cost of materials will be $10 per shirt. What is the break-even quantity? a. 8,000 shirts b. 16,000 shirts c. 5,334 shirts d. 3,200 shirts

Answer 1

Answer:

Option (a) is correct.

Explanation:

Contribution per unit:

= Selling price per unit - Variable cost

= Selling price per unit - (Material  + labor cost)

= $25 - ($10 + $5)

= $25 - $15

= $10

Fixed cost = Administrative cost + Sales and marketing expense

                 = $60,000 + $20,000

                 = $80,000

Break-even quantity:

= Fixed cost ÷ Contribution per unit

= $80,000 ÷ $10

= 8,000 shirts

Answer 2

The break-even quantity is 8000 shirts.

What is breakeven?

Breakeven is the point in which the profit is 0, hence the revenue is equal to the cost of production.

Total cost = 5x + 60000 + 20000 + 10x = 15x + 80000

Revenue = 25x, hence:

25x = 15x + 80000

x = 8000 shirts

The break-even quantity is 8000 shirts.

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