Sales Level Decisions
Example 1
College Creations
Break Even
College Creations, Inc (CC), builds a loft that is easily adaptable to most dorm rooms or apartments and can be assembled into a variety of configurations. Each loft is sold for $500, and the cost to produce one loft is $300, including all parts and labor. CC has fixed costs of $100,000.
How many units would CC need to sell in order to break even?
How many units would CC need to sell if they wanted to have a pretax profit of $50,000?
Break-even can be determined by Fixed Costs/Contribution Margin per unit: $100,000 / $200 = 500.
Five hundred lofts must be sold to break even.
The desired profit can be treated like a fixed cost, and the target profit would be (Fixed Costs + Desired Profit) / Contribution Margin or ($100,000 + $50,000) / $200 = 750.
Seven hundred fifty lofts need to be sold to reach a desired income of $50,000.
Another way to have found this is to know that, after fixed costs are met, the $200 per unit contribution margin will go toward profit.
The desired profit of $50,000 / $200 per unit contribution margin = 250. This means that 250 additional units must be sold.
To break even requires 500 units to be sold, and to reach the desired profit of $50,000 requires an additional 250 units, for a total of 750 units.
| Break Even | Profit of $50,000 | |
| Units Sold | 500 | 750 |
| Sales revenue | $250,000 | $375,000 |
| Variable costs per unit | 150,000 | 225,000 |
| Contribution margin | $100,000 | $150,000 |
| Fixed costs | 100,000 | 150,000 |
| Operating Income | $0 | $50,000 |