A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:
A) $65,000.
B) $90,000.
C) $125,000.
D) $215,000.
E) $275,000.

Question

Quizplus · Accepted Answer

Total revenue = Units sold x Price per unit = 25,000 x $11 = $275,000
Total variable costs = Units sold x Variable cost per unit = 25,000 x $5 = $125,000

Contribution margin (the amount that goes towards covering fixed costs and generating profit) per unit = Price per unit - Variable cost per unit = $11 - $5 = $6

To generate a pretax income of $60,000, the contribution margin must cover the fixed costs as well. Let the total fixed costs be X, then:

Contribution margin x Units sold - X = Pretax income
$6 x 25,000 - X = $60,000
X = $90,000

Therefore, the total fixed costs are $90,000. Option B is the correct answer.

A Firm Expects to Sell 25,000 Units of Its Product