Question

Hat Hat is considering opening a stand in a mall to sell caps. He wants to know how many caps he has to sell to break even. The caps would sell for $ 20, variable costs of $ 12 per cap, and the annual fixed costs are $ 50,000.
How many caps does he have to sell annually to break even. (3 points)
What would be the total operating costs to break even? (3 points)
If Hat Hat estimates that the least that business sells is 950 caps per month, should he start the business? (3 points)
What would be the net profit before income tax that Hat Hat would have if he sold 950 caps per month? (3 points)

Answer 1

Selling price per unit	$20
Less:Variable cost per unit	12
Contribution per unit	8
Annual fixed cost	$50,000

Break even (units) = Fixed cost/ Contribution per unit

= 50,000/8

= 6,250 units (annually)

(a) Number of caps he have to sell annually to have break even = 6,250 caps

(b) Total operating cost to break even:

Number of caps produce annually at break even	6,250
Variable cost per unit	$12
Total Variable cost at break even : 6,250 caps * $12 =	$75,000
Add: Annual fixed cost	50,000
Total operating cost	$125,000

Note : A business has two kinds of expenses that make up total operating cost, these are fixed and variable.

(c) If business sells 950 caps per month

Monthly fixed cost = $50,000/12

= 4167

Break even point units (monthly) = Monthly fixed cost / contribution margin per unit

= $4167/$8

= 521 caps

Yes, he should start the business, if he sells 950 caps per month because it is more than break even units and at break even point there is no profit and no loss and above break even point there is Profit.

(d) Number of caps sold 950

Particular	950 caps sold Amount ($)
Sales revenue (950 caps * $20)	19,000
Less: Variable cost (950 caps * $12)	11,400
Contribution margin	7,600
Less : Fixed cost monthly ($50,000/12)	4,167
Net profit before income tax	3,433

Thank you :)