Diva Products produces scarves.The estimated fixed costs for the year are $164,500, and the estimated variable costs per unit are $9.The company expects to produce and sell 40,000 scarves at a unit selling price of $16 per unit.By how much can sales revenue drop before Diva Products incurs a loss?

Question

Quizplus · Accepted Answer

To determine the sales revenue drop before incurring a loss, first calculate the break-even point. The break-even point in units is calculated as Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Here, it's $164,500 / ($16 - $9) = $164,500 / $7 = 23,500 units. The break-even sales revenue is 23,500 units * $16/unit = $376,000. The initial expected sales revenue is 40,000 units * $16/unit = $640,000. The difference between the expected sales revenue and the break-even sales revenue is $640,000 - $376,000 = $264,000. This is the amount by which sales revenue can drop before the company incurs a loss.

Diva Products Produces Scarves