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.)

a)5,781
b)4,700
c)5,452
d)4,841
e)3,854

Explanation / Answer

VC= $250 per unit Price = $500 per unit FC = $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 = (675000+500000) / (250) =4700 units " Answer is b)4700units

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