Question

Chokkar Plastics is considering an expansion project with estimated fixed costs of $39,800, depreciation of $22,800, variable costs per unit of $5.74, and an estimated sales price of $12.99 per unit. How many units must the firm sell to break even on a cash basis?

a. 3.145 units
b. 1,802 units
c. 2,345 units
d. 8,634 units
e. 5,490 units

Answer 1

To break even on a cash basis, Chhokar Plastics must sell 5,490 units, excluding the effects of depreciation. This is calculated using their fixed costs and the difference between the selling price and variable cost per unit.

Step-by-step explanation:

To calculate the number of units Chhokar Plastics must sell to break even on a cash basis, we need to determine the point where the total revenue equals the total variable costs plus the fixed costs, without including depreciation as it is a non-cash expense. The formula for the break-even quantity (Q) on a cash basis is:

Fixed Costs / (Sales price per unit - Variable cost per unit) = Q

Using the given data:

$39,800 / ($12.99 - $5.74) = Q

Q = $39,800 / $7.25

Q = 5,490 units

Therefore, Chhokar Plastics must sell 5,490 units to break even on a cash basis. Choice e. 5,490 units is the correct answer.