Question

To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Free Spirit Industries Inc.: Free Spirit Industries Inc. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $10.75 per unit. Given Free Spirit’s cost structure, it will have to sell units to break even on this project ( QBE ). Free Spirit’s marketing and sales director doesn’t think that the firm’s market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks that the demand for Free Spirit’s product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 200,000 units, what price must it set to break even? $72.90 per unit $57.71 per unit $60.75 per unit $66.83 per unit

Answer 1

The correct answer is C.

Step-by-step explanation:

Giving the following information:

Free Spirit Industries Inc. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit and will incur a variable cost of $10.75 per unit. The firm will be able to sell only about 200,000 units.

Price= ?

We need to calculate the price using the break-even formula:

Break-even point= fixed costs/ contribution margin

200,000= 10,000,000/ (P - 10.75)

200,000P - 2,150,000 = 10,000,000

P= 12,150,000/200,000

P= $60.75 per unit