Question

Stewart machine sales, inc., is a distributor of machine tools and supplies. in the last several months, they had been presented with the opportunity to handle a new line of small carbide drills. in considering whether to take on this additional line, stewart developed a preliminary forecast for the product line for 2015 which assumed no additional expenditures for advertising or promotional literature.

-they felt they would be able to sell 100,000 units at a selling price averaging $10 per unit.
-they assumed additional fixed costs of $300,000 if this line were carried.
-variable costs were estimated to be $600,000.

How many units must they sell to break-even?

Answer 1

Stewart Machine Sales, Inc. must sell 75,000 units of the small carbide drills to break-even, which is calculated using the break-even point formula with given fixed costs and estimated variable costs.

Step-by-step explanation:

To calculate how many units Stewart Machine Sales, Inc. must sell to break-even on their additional line of small carbide drills, we can use the break-even point formula. The break-even point is where total revenue equals total fixed and variable costs. The formula is Break-Even Units (BEU) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit).

In this case, the fixed costs are $300,000 and they plan to sell the drills at a price of $10 per unit. The variable costs are estimated to be $600,000 for 100,000 units, which means the variable cost per unit is $600,000 / 100,000 units = $6 per unit. Plugging these values into our formula:

BEU = $300,000 / ($10 - $6)

BEU = $300,000 / $4

BEU = 75,000 units

Therefore, Stewart Machine Sales, Inc. needs to sell 75,000 units of the small carbide drills to break-even.