Question

Fixed investments for manufacturing a product in a particular year is Rs. 80,000. The estimated sales for this period is 2,00,000. The variable cost per unit for this product is Rs. 4. If each unit sold is at Rs. 20, then the break-even point would be:

• A. 4000
• B. 5000
• C. 10000
• D. 20000

Hint:

Remember that the break-even point is where total revenue equals total costs. Understanding the contribution margin (the amount each sale contributes towards covering fixed costs and then generating profit) is key to this calculation.

Answer 1

The Correct Option is B

Step 1: Understand the concept of the break-even point.
The break-even point (BEP) is the level of sales at which total revenue equals total costs (both fixed and variable). At the break-even point, the company makes neither a profit nor a loss. Step 2: Identify the given financial information.
Fixed Costs (FC) = Rs. 80,000
Selling Price per unit (SP) = Rs. 20
Variable Cost per unit (VC) = Rs. 4
The estimated sales of Rs. 2,00,000 are not directly needed to calculate the break-even point in units but can be used to understand the context. Step 3: Recall the formula for the break-even point in units.
The break-even point in units is calculated as: \[ \text{BEP (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per unit} - \text{Variable Cost per unit}} \] The denominator (Selling Price per unit - Variable Cost per unit) is also known as the contribution margin per unit. Step 4: Calculate the contribution margin per unit.
Contribution Margin per unit = SP - VC = Rs. 20 - Rs. 4 = Rs. 16. Step 5: Calculate the break-even point in units.
\[ \text{BEP (units)} = \frac{\text{Rs. 80,000}}{\text{Rs. 16}} = 5000 \, \text{units}. \] The break-even point is 5000 units. Step 6: Select the correct answer.
The break-even point is 5000, which corresponds to option 2.