A company manufactures and sells widgets. Total fixed costs per month are $300,000. Variable cost per widget is $50 and each widget sells for $100. How many widgets must be sold each month to break even?

Rationale

To break even, the company must sell 3,000 widgets each month.

To determine the break-even point, one must calculate the total costs and revenues. The break-even point occurs when total revenue equals total costs. In this case, with fixed costs of $300,000 and a contribution margin of $50 per widget, the calculation shows that selling 3,000 widgets achieves this balance.

A (2,000) YOUR ANSWER

If the company sells 2,000 widgets, the total revenue would be $200,000 (2,000 widgets x $100 each). However, the total costs would be $300,000 (fixed costs) + $100,000 (variable costs for 2,000 widgets). This results in total costs of $400,000, leading to a loss of $200,000.

B (3,000) CORRECT

Selling 3,000 widgets generates total revenue of $300,000 (3,000 widgets x $100 each). The total costs would be $300,000 (fixed costs) + $150,000 (variable costs for 3,000 widgets), resulting in total costs of $450,000. The balance is achieved when total revenue equals total costs, confirming 3,000 widgets as the break-even point.

C (4,500) YOUR ANSWER

At 4,500 widgets sold, the total revenue would be $450,000 (4,500 widgets x $100 each). The total costs would amount to $300,000 (fixed costs) + $225,000 (variable costs for 4,500 widgets), leading to total costs of $525,000. Thus, the company incurs a loss of $75,000.

D (6,000) YOUR ANSWER

Selling 6,000 widgets would yield a total revenue of $600,000 (6,000 widgets x $100 each). The total costs would be $300,000 (fixed costs) + $300,000 (variable costs for 6,000 widgets), resulting in total costs of $600,000. While this results in no profit or loss, it exceeds the break-even volume needed.

Conclusion

The break-even analysis shows that the company must sell 3,000 widgets each month to cover both fixed and variable costs. Selling fewer widgets results in a loss, while selling more than the break-even amount leads to profit. Understanding this calculation is crucial for the company to maintain financial health and operational sustainability.

A company manufactures and sells widgets. Total fixed costs per month are $300,000. Variable cost per widget is $50 and each widget sells for $100. How many widgets must be sold each month to break even?

To break even, the company must sell 3,000 widgets each month.

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