Another important input into the wholesale selling price decision is SMG’s cost

Question

Another important input into the wholesale selling price decision is SMG’s cost structure for the new product. Here is the information the company has given you to help them in their decision:

The variable cost per unit is $1.25. These variable costs are basically labor and materials required to manufacture each tube of toothpaste. The fixed cost allocation to this new product is $2.5 million, which includes factory space allocation, utilities, management salaries, and marketing costs, among other things.

If SMG sets the wholesale selling pricethey will charge to Walgreen’s (and other retailers) at $3.50, then what is SMG’s breakeven volume in units?   In other words, how many tubes of toothpaste would SMG need to sell to retailers to break even and cover their fixed costs for the product?   Show your work.  

Explanation / Answer

Variable cost per unit = 1.25

Selling price per unit = 3.5

Fixed cost = 2.5 million

Contribution margin per unit = 3.5 - 1.25 = 2.25

So, no. of units to be sold for breakeven = 2.5 million/2.25

= 1,111,112

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