A group of venture investors is considering putting money into Lemma Books, whic

Question

A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, or $500, and fixed costs are estimated at $675,000. The investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the breakeven formula, but include the required profit in the numerator.) Select one: a. 5,781 b. 4,700 c. 5,452 d. 4,841 e. 3,854

Explanation / Answer

Variable cost = $250 per unit
Price = $500 per unit
Ffixed costs = $675,000
Minimum profit = $500,000

Contribution per unit = Sales price per unit - VC per unit
.'. Contribution per unit = 500-250 = $250 per unit

Required Sales = (Fixed Cost + Required Profit) / (Contribution per unit)
.'. Required Sales = ($675,000+ $500,000) / (250)
= 4,7000 units

Option b. 4,700 is correct answer.

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