Final answer:
The variable cost per unit is calculated by first determining the total variable costs at the break-even point and then dividing by the number of units. With fixed costs of $60,000, a price of $7.00 per unit, and a break-even point at 25,000 units, the variable cost per unit comes out to be $4.60.
Option 'b' is the correct.
Step-by-step explanation:
To calculate the variable cost per unit, we must understand the relationship between fixed costs, price, break-even point, and variable costs.
Given a firm has fixed costs of $60,000, a price of $7.00 per unit, and a break-even point of 25,000 units, we can use this information to find the variable cost per unit.
At the break-even point, total revenue equals total costs, which is the sum of fixed costs and variable costs. Therefore, the total revenue at the break-even point is 25,000 units multiplied by the $7.00 price per unit, equating to $175,000.
Since total costs at the break-even point are equal to total revenue, the total costs will also be $175,000. Subtracting the fixed costs of $60,000 from the total costs gives us the total variable costs, which would be $175,000 - $60,000 = $115,000.
To find the average variable cost per unit, we divide the total variable costs by the number of units. This gives us an average variable cost of $115,000 / 25,000 units = $4.60 per unit, which corresponds to option B.