What is the break-even sales point of a company if the selling price is $5, variable costs are $3, and fixed costs are $100,000?
The break-even sales point for the company is 20,000 units. The company needs to sell 20,000 units to cover its fixed costs and reach the break-even point.
Calculating Break-Even Sales Point
Break-even sales point refers to the level of sales at which the company's total revenue equals its total costs. In this case, the company's selling price is $5 per unit, variable costs are $3 per unit, and fixed costs are $100,000. To calculate the break-even sales point, we need to determine the contribution margin per unit and use it to find the number of units the company needs to sell to break even.
Contribution Margin Calculation
The contribution margin per unit is calculated as the selling price per unit minus the variable cost per unit. In this case, the contribution margin per unit is $5 - $3 = $2.
Calculating Break-Even Sales Point
To cover the fixed costs and break even, the number of units the company needs to sell can be calculated by dividing the total fixed costs by the contribution margin per unit. Therefore, $100,000 / $2 = 50,000 units.
Therefore, the company needs to sell 20,000 units to cover its fixed costs and reach the break-even point. Selling fewer than 20,000 units would result in a loss, while selling more than 20,000 units would generate a profit.