Question

Gourmet Pets is interested in computing the break-even point for its new product Prime Cuts. The fixed costs of adding this product to the product line amounts to $20,000. Variable costs to produce one package of Prime Cuts are $2. Prime Cuts will sell for $6 per package. The break-even point would be:

Answer 1

Answer:

Break-even point=5,000 units

Explanation:

Giving the following information:

The fixed costs of adding this product to the product line amounts to $20,000. Variable costs to produce one package of Prime Cuts are $2. Prime Cuts will sell for $6 per package.

To calculate the break-even point, we need to use the following formula:

Break-even point= fixed costs/ contribution margin

Break-even point= 20,000/ (6 - 2)

Break-even point=5,000 units

Answer 2

The correct statement is that the break-even point for Gourmet pets will be 5000 units if there is a cut of $2 in its prices of goods offered which is the variable cost.

The break-even cost will be calculated by dividing the fixed costs of the firm by the variable costs and final calculation of the contribution margin in the formula.

Calculation of Break-Even Point

• The formula for the calculation of the break-even point is as follows,

• $\rm Break\ Even\ Point= \dfrac{Fixed\ Costs}{Contribution\ Margin}$

• The contribution margin is the total obtained by subtracting the variable cost of the firm from the selling price per unit, which can be calculated as,

• $\rm Contribution\ Margin= Selling\ Price- Variable\ Cost\\ \\ \rm Contribution\ Margin= \ 6-\ 2\\ \\ \rm Contribution\ Margin= \ 4$

• Now putting the values available in the formula for break even point, we get the values as,

• $\rm Break\ Even\ Point= \dfrac{\ 20000}{\ 4}\\ \\ \rm Break\ Even\ Point= 5000\ units$

• So, the break even point for the firm is calculated at 5000 units of production.

Hence, the break-even point for Gourmet Pets at fixed costs of $20000 will be 5000 units if the selling price is $6 and the variable costs per unit are $2.

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