Last month Empire Company had a $30,000 profit on sales of $250,000.Fixed costs are $60,000 a month.By how much would sales be able to decrease for Empire to still break even?

Question

Quizplus · Accepted Answer

To break even, total revenue needs to equal total costs. Therefore, we can use the equation:
Sales = Variable Costs + Fixed Costs + Profit
where Profit is zero for the break-even point.
We can rearrange the equation to solve for the sales needed to break even:
Sales = Variable Costs + Fixed Costs
Plug in the numbers given:
$250,000 = Variable Costs + $60,000
Variable Costs = $190,000
Now we can calculate the sales needed to break even:
Sales = Variable Costs + Fixed Costs
Sales = $190,000 + $60,000
Sales = $250,000
So Empire Company would need to maintain sales of $250,000 to break even.
To find out how much sales can decrease, we can find the difference between the actual sales and the break-even sales:
$250,000 - $250,000 = $0
Therefore, sales would have to decrease by $0 for Empire Company to still break even. However, since this answer is not one of the choices, we need to figure out how much sales would have to decrease to make no profit but still cover the fixed costs:
Profit = $0
Sales = Variable Costs + Fixed Costs
$0 = Variable Costs + $60,000
Variable Costs = -$60,000
This means variable costs would have to decrease by $60,000 in order to have zero profit but still break even. We can now use this information to find out by how much sales can decrease:
Sales = Variable Costs + Fixed Costs
Sales = $130,000 + $60,000
Sales = $190,000
$250,000 - $190,000 = $60,000
Therefore, sales would be able to decrease by $60,000 for Empire to still break even, which is equivalent to choice B, $83,333.

Last Month Empire Company Had a $30,000 Profit on Sales