On-The-Go Merchandiser sells luxury carry-on travel bags for $1,200 each. The firm's fixed operating costs are $600,000 when 5,000 or fewer bags are produced, and its variable cost ratio is 80 percent (i.e., variable cost per unit is 80 percent of the selling price). What is On-The-Go's operating breakeven point?

Question

Quizplus · Accepted Answer

To calculate the operating breakeven point, we need to find the number of bags that On-The-Go needs to sell to cover its fixed and variable costs, without generating any profit.

We know that each bag sells for $1,200 and that the variable cost ratio is 80%. Therefore, the variable cost per unit is 80% of $1,200, or $960. This means that the contribution margin per unit is $240 ($1,200 - $960).

To cover its fixed costs of $600,000, On-The-Go needs to sell:

$600,000 / $240 = 2,500 bags

Therefore, the operating breakeven point is 2,500 bags. Choice D is the correct answer.

On-The-Go Merchandiser Sells Luxury Carry-On Travel Bags for $1,200 Each