Reading 32- LOS d ～ Q1－5

1.Annual fixed costs at King Mattress amount to $325,000. The variable cost of raw materials and labor is $120 for the typical mattress. Sales prices for mattresses average $160. How many units must King Mattress sell to break even?

A)   40.

B)   2,031.

C)   8,125

D)   2,708.

The correct answer was C)

Q_Breakeven = Fixed Cost / (Price – Variable Cost)
Q_Breakeven = $325,000 / (160 – 120) = 8,125

2.Annah Korotkin is the sole proprietor of CoverMeUp, a business that designs and sews outdoor clothing for dogs. Each year, she rents a booth at the regional Pet Expo and sells only blankets. Korotkin views the Expo as primarily a marketing tool and is happy to breakeven (that is, cover her booth rental). For the last 3 years, she has sold exactly enough blankets to cover the $750 booth rental fee. This year, she decided to make all blankets for the Expo out of high-tech waterproof/breathable material that is more expensive to produce, but that she believes she can sell for a higher profit margin. Information on the two types of blankets is as follows:

Assuming that Korotkin remains most interested in covering the booth cost (which has increased to $840), how many more or fewer blankets (new style) does she need to sell to cover the booth cost? To cover this year’s booth costs, Korotkin needs to sell:

A)   42 more blankets than last year.

B)   42 fewer blankets than last year.

C)   the same amount of blankets as last year.

D)   30 fewer blankets than last year.

The correct answer was D)

To obtain this result, we need to calculate Last Year’s Breakeven Quantity, This Year’s Breakeven Quantity, and calculate the difference.

Step 1: Determine Last Year’s (Basic Blanket) breakeven quantity:

           Q_BE = (Fixed Costs) / (Sales Price per unit – Variable Cost per unit) = 750 / (25 – 20) = 150

Step 2: Determine This Year’s (New Blanket) breakeven quantity:

           Q_BE = (Fixed Costs) / (Sales Price per unit – Variable Cost per unit) = 840 / (40 – 33) = 120

Step 3: Determine Change in Units:

            DQ = Q_{This Year} – Q_{Last Year} = 120 – 150 = -30. Korotkin needs to sell 30 fewer  blankets.

3.Jayco, Inc. has a division that makes red ink for the accounting industry. The unit has fixed costs of $10,000 per month, and is expected to sell 40,000 bottles of ink per month. If the variable cost per bottle is $2.00 what price must the division charge in order to breakeven?

A)   $2.50.

B)   $2.75.

C)   $3.25.

D)   $2.25.

The correct answer was D)

40,000 = $10,000/(P - $2)
40,000P – $80,000 = $10,000
P = $90,000/40,000 = $2.25.

4.Given: price = $35 per unit, variable cost = $15 per unit, and total cost = $200,000. If sales equal 10,000 units, what is the firm's breakeven sales quantity?

A)   1,750 units.

B)   2,500 units.

C)   3,000 units.

D)   3,500 units.

The correct answer was B)

QBE = FC / (P - V)

FC = TC - VC = 200,000 - 150,000 = 50,000

Q = 50,000 / (35 - 15) = 2,500

5.Jayco, Inc., sells blue ink for $4.00 a bottle. The ink's variable cost per bottle is $2.00. Ink has fixed cost of $10,000. What is Jayco's breakeven point in units?

A)   2,500.

B)   6,000.

C)   7,500.

D)   5,000.

The correct answer was D)

Q_BE = [FC] / (P - V)

Q = [10,000] / (4.00 - 2.00) = 5,000