Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are $0.5 million per year. The equipment is expected to last for five years. The manufacturing cost per hammer is $1and the selling price per hammer is $6. Calculate the break-even volume per year. (Ignore taxes.)
A) 500,000 units
B) 600,000 units
C) 100,000 units
D) None of the above

Question

Quizplus · Accepted Answer

The break-even volume is calculated by dividing the total fixed costs by the contribution margin per unit. Fixed costs are $0.5 million per year. The contribution margin per hammer is $6 (selling price) - $1 (cost) = $5. Therefore, the break-even volume is $0.5 million / $5 = 100,000 units.

Hammer Company Proposes to Invest $6 Million in a New