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Break-even and target profits
Break-even and target profits. Analysis of the operations of Padillo Company shows the
fixed costs to be $20 0,000 and the variable costs to be $8 per unit. Selling price is $16 per
unit.
a. Derive the break-even point expressed in units.
b. How many units must the firm sell to earn a profit of $280,000?
c. What would profits be if revenue from sales were $2,000,000?
Expert Solution
1.Computation of Break-even Point expressed in Units:
Break-even Point (in units) = Fixed Costs/Contribution Margin per Unit
Here,
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit = $16 - $8 = $8 per unit
Break-even Point (in units) = $200,000/$8 = 25,000 units
2.Computation of Number of Units Firm sell to Earn a Profit of $280,000:
Number of Units Sold = (Fixed Costs+Required Profit)/Contribution Margin per Unit
= ($200,000+$280,000)/$8
= $480,000/$8
Number of Units Sold = 60,000 units
3.Computation of Profit:
Profit = Sales - Variable Cost - Fixed Cost
= $2,000,000 - ($2,000,000/$16*$8) - $200,000
= $2,000,000 - $1,000,000 - $200,000
Profit = $800,000
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