Question

Loretta & Niece's fixed costs are $425,000, including $25,000 of depreciation expense. The price of each unit sold is $120, and the variable cost per unit is $60. How many units must the firm sell to reach the cash break-even point?

A. Less than 7,333 units

B. 7,333 units

C. More than 7,333 units

D. Not enough information has been provided to determine the cash break-even point.

Answer 1

The cash break-even point is reached when Loretta & Niece's sell at least 6,667 units as they need to cover $400,000 in cash fixed costs, and each unit contributes $60 to covering these costs.

Step-by-step explanation:

To determine how many units Loretta & Niece's must sell to reach the cash break-even point, we need to consider only the cash expenses, which are the fixed costs excluding depreciation, since depreciation is a non-cash expense. The total cash fixed costs are $425,000 - $25,000 = $400,000. Each unit sold contributes $120 - $60 = $60 to covering fixed costs (this is the contribution margin). To find the break-even quantity, divide the total cash fixed costs by the contribution margin per unit.

So, the cash break-even point in units is $400,000 / $60 per unit = 6,666.67 units. Since we can't sell a fraction of a unit, the firm must sell at least 6,667 units to cover all cash expenses. Therefore, looking at the given options, the correct answer is C. More than 7,333 units.