Question

A company is considering producing a product for a new market. The fixed costs required for manufacturing and delivering the product is $50,000. Labor and material costs are estimated to be approximately $25.00 per product. If the product is sold for $35.00 each, the firm's break-even volume would be:

a) 50,000 units
b) 5,000 units
c) 2,500 units
d) 500 units

Answer 1

The break-even volume for the company considering producing a new product is 5,000 units, calculated by dividing the fixed costs of $50,000 by the per-unit profit of $10 ($35 selling price minus $25 variable cost). This means that option b) 5,000 units is the correct answer.

Step-by-step explanation:

The question concerns the calculation of the break-even volume for a company considering entering a new market, which is a fundamental concept in cost accounting and business. To find the break-even point, we need to determine the point at which total costs equal total revenues. The fixed costs for the company are given as $50,000, and the variable costs (labor and materials) are $25.00 per product. The selling price per product is $35.00.

To calculate the break-even volume, we can use the formula:

Break-even volume = Fixed costs / (Selling price per unit - Variable cost per unit)

Plugging in the given values:

Break-even volume = $50,000 / ($35 - $25)

Break-even volume = $50,000 / $10 per product

Break-even volume = 5,000 products

Therefore, the firm needs to sell 5,000 units of the product to break even. This means that option b) 5,000 units is the correct answer.