A project has earnings before interest and taxes of $6,500, ﬁxed costs of $40,000, a selling price of $12 a unit, and a sales quantity of 10,000 units. Depreciation is $8,500. What is the variable cost per
Unit?
A) $6.25
B) $6.50
C) $6.75
D) $7.00
E) $7.25

Question

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit:

Selling price per unit - Variable cost per unit = Contribution Margin per unit

Since we don't know the variable cost per unit, we'll leave that as "VC" for now:

$12 - VC = Contribution Margin per unit

Next, let's calculate the total contribution margin:

Contribution Margin per unit x Sales quantity = Total Contribution Margin

($12 - VC) x 10,000 = Total Contribution Margin

$120,000 - 10,000VC = Total Contribution Margin

We know that EBIT (earnings before interest and taxes) is $6,500:

Sales - Variable costs - Fixed costs - Depreciation = EBIT

$120,000 - (VC x 10,000) - $40,000 - $8,500 = $6,500

$71,500 - (VC x 10,000) = $6,500

Subtracting $71,500 from both sides:

- (VC x 10,000) = $6,500 - $71,500
- (VC x 10,000) = -$65,000
- VC = -$65,000 / 10,000
- VC = $6.50

Therefore, the variable cost per unit is $6.50.

A Project Has Earnings Before Interest and Taxes of $6,500