A firm with $50,000 in fixed costs, selling price of $25 per unit, and variable costs of $5 a unit is currently operating at breakeven volume. If sales decrease 50 units and costs remain the same, the firm will:
A) have a loss of $1,000.
B) have a profit of $2,000.
C) increase variable costs of $2,500.
D) lower its total fixed costs.

Question

Quizplus · Accepted Answer

At the breakeven point, total revenue equals total costs. A decrease in sales by 50 units at a selling price of $25 per unit results in a loss of $1,250 in revenue. However, the variable cost also decreases by $5 per unit for the 50 units not sold, saving $250. The net effect is a loss of $1,000 ($1,250 - $250).

A Firm with $50,000 in Fixed Costs, Selling Price of $25