Senbet Ventures is considering starting a new company to produce stereos.The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000.What sales volume would be required in order to break even,i.e.,to have an EBIT of zero for the stereo business?
A)86,640
B)91,200
C)96,000
D)100,800

Question

Quizplus · Accepted Answer

To break even EBIT (Earnings before interest and taxes) should be zero.
EBIT = Total Revenue – Total Costs
Let's calculate the total cost first:
Total cost = Fixed cost + Variable cost
Total cost = $120,000 + ($2.50 * Volume)
Total Revenue = 1.5 * Variable Cost / Unit * Volume

To break even EBIT = 0, the equation should be satisfied as follows:
Total Revenue - Total Cost = 0
1.5 * $2.50 * Volume - $120,000 - $2.50 * Volume = 0
$3.75 * Volume - $120,000 = 0
$3.75 * Volume = $120,000
Volume = $120,000 / $3.75
Volume = 32,000 units

Therefore, the sales volume required to break even is 96,000 units (C).

Senbet Ventures Is Considering Starting a New Company to Produce