This is a sample question and I have the answer that the prof says is correct. I

Question

This is a sample question and I have the answer that the prof says is correct. I cannot get to it. Understanding the equation goes as follows:

Break even level of revenues = total fixed costs/(1-(total variable costs / revenues)

Here is the info:
Average selling price per unit is $15.00
Variable cost per unit is $10.00
Units sold = 200,000
Fixed cost = $450,000
Interest expense = $40,000 (my understanding this is a fixed cost)

I take $15 X 200,000 = $3,000,000 Revenues
Then $10 X 200,000 = $2,000,000 Total variable costs
Fixed costs = $450,000 + $40,000 = $490,000

Using the equation Break even level of revenues = total fixed costs/(1-(total variable costs / revenues)

$490,000/(1 - (2,000,000/3,000,000) = $490,000 / (1 - .667) = $490,000 / .333 = $1,471,471.40 Break even sales revenues.

The prof says it is $1,350,000. Where am I going wrong.

Please be specific and help with the equation. Thanks

Explanation / Answer

If you assume that interest is NOT a fixed cost then your professor is correct, but you are correct in assuming that interest expense is a fixed cost (unless you want to declare bankruptcy). The break-even level of sales for only 450,000 in sales would be $1,350,000, or what your professor said, but that is incorrect. What you have is correct.

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