A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units

Accounting Dec 08, 2020

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit?

a) $22.16

b) $23.84

c) $24.09

d) $24.23

e) $25.18

Expert Solution

The correct choice is Option C.

Contribution
= Earnings before interest and Tax + Depreciation + All other fixed costs
= $14,600.00 + $12,000.00 + $52,000.00
= $78,600.00

Now,

Contribution per unit
= Total Contribution / Number of units
= $78,600.00 / 16,000
= $4.9125

Variable cost per unit
= Sales price per unit - Contribution per unit
= $29.00 - 4.9125
= $24.0875
= $24.09

Base case variable cost is the variable cost without considering the inaccuracy or the base data available.

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