Ace Shoe Company sells heel replacement kits for men's shoes.It has fixed costs of $6 million and unit variable costs of $5 per pair.Ace would like to earn a profit of $2 million; how many pairs must they sell at a price of $15?

Question

Quizplus · Accepted Answer

First, we can use the formula to calculate the break-even point:

Break-even point = Fixed costs / Unit contribution margin

Unit contribution margin = Unit price - Unit variable costs
Unit contribution margin = $15 - $5 = $10

Break-even point = $6,000,000 / $10 = 600,000 pairs

To earn a profit of $2,000,000, we need to add this amount to the fixed costs:

New total costs = $6,000,000 + $2,000,000 = $8,000,000

Now, we can use the same formula to calculate the required sales volume:

Sales volume = (Fixed costs + Target profit) / Unit contribution margin

Sales volume = $8,000,000 / $10 = 800,000 pairs

Therefore, Ace Shoe Company must sell 800,000 kits to earn a profit of $2 million, which is closest to choice D (800,000 kits).

Ace Shoe Company Sells Heel Replacement Kits for Men's Shoes