Reese, Inc. produces pliers. Each pair of pliers sells for $8.00. Variable costs per unit total $5.60 of which $2.50 is for direct materials and $2.10 is for direct labour.
-If total fixed costs are $62,000, contribution margin per unit is $5.00, and targeted after-tax net income is $12,000 with a 40 percent tax rate, how many units must be sold to break even?
A) 16,400
B) 14,800
C) 12,400
D) 11,440

Question

Quizplus · Accepted Answer

To break even, the total contribution margin should equal the total fixed costs. Let x be the number of units sold to break even. The contribution margin per unit is $5.00.
Contribution Margin = Unit selling price - Variable cost per unit
$5x = $8x - $5.60x
$5x = $2.4x + $62,000
$2.6x = $62,000
x = $62,000 / $2.6 = 23,846.15... .
The company needs to sell 23,846.15... pairs of pliers to break even, but since they cannot sell a fraction of a pair, they must round up to the next whole number.
Thus, the company needs to sell 12,400 pairs of pliers to break even.