A venture capital investment group received a proposal from Wireless Solutions to produce a new smart phone.The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $750,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more.What sales volume would be required in order to meet this profit goal?
A) 4,513
B) 4,750
C) 5,000
D) 5,250
E) 5,513

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:

Sales Price = $250 x 2 = $500
Contribution Margin = Sales Price - Variable Cost = $500 - $250 = $250

Next, we can use the contribution margin to calculate the break-even point in units:

Break-Even Point (in units) = Fixed Costs / Contribution Margin
Break-Even Point (in units) = $750,000 / $250 = 3,000

Finally, we can use the break-even point and the profit goal to calculate the required sales volume:

Operating Income = (Sales Volume x Contribution Margin) - Fixed Costs
$500,000 = (Sales Volume x $250) - $750,000
$500,000 + $750,000 = Sales Volume x $250
$1,250,000 / $250 = Sales Volume
Sales Volume = 5,000 units

A Venture Capital Investment Group Received a Proposal from Wireless