HomeCraft makes wooden play sets.The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year.Each play set requires $400 of wood,ten hours of labor at $70 per hour,and variable overhead costs of $100.Fixed advertising expenses equal $100,000 per year.Each play set sells for $3,200.What is HomeCraft's break-even output level?

Question

Quizplus · Accepted Answer

To find the break-even output level, we need to first calculate the total fixed costs and variable costs per unit.

Fixed costs: 
Rent + Salaries + Advertising = $400,000 + $150,000 + $100,000 = $650,000

Variable costs per unit: 
Wood + Labor + Variable Overhead = $400 + ($70 x 10) + $100 = $1,100

Contribution margin per unit: 
Selling Price - Variable Costs = $3,200 - $1,100 = $2,100

Now we can calculate the break-even output level:

Break-even Output Level = Fixed Costs / Contribution Margin per Unit 
Break-even Output Level = $650,000 / $2,100 = 309.52

Since we can't sell fractional play sets, we need to round up to the nearest whole number. Therefore, the break-even output level is 310 play sets.

Out of the given choices, the closest option to 310 is B (325 play sets).

HomeCraft Makes Wooden Play Sets