The company is planning to sell product z for $10 a unit. Variable costs are $6 a unit and fixed cost are $100,000. What must total sales be to break even?
To find the total sales amount needed to break even, we need to understand and calculate a few key terms: variable costs, fixed costs, and contribution margin.
1. Variable Costs (VC): These costs vary directly with the level of production or sales. In this case, the variable cost per unit is given as $6.
2. Fixed Costs (FC): These are costs that remain constant regardless of the level of production or sales. In this case, the fixed cost is given as $100,000.
3. Contribution Margin (CM): This represents the amount available to cover fixed costs and contribute to profit. It is calculated as the selling price per unit minus the variable cost per unit. In this case, CM = $10 - $6 = $4 per unit.
Now, to find the total sales required to break even, we divide the total fixed costs by the contribution margin per unit.
Break-even sales = Total fixed costs / Contribution Margin per unit
$100,000 / $4 = 25,000 units
Therefore, the total sales needed to break even in this scenario is 25,000 units.