Q:
A:
CFA Level 2 2005 LOS: 8.1.E.f
For
each widget that a manufacturer sells, it records
a sale of $5 and a variable cost of $3. In addition,
the firm has fixed expenditures of $1,000,000 per
year. Which of the following statements is inaccurate
in describing the company's profitability at various
levels of sale?
a) The breakeven point for the company occurs when it sells 500,000 units. At 1,000,000 units sold, the company would incur a profit of $1,000,000.
b) The company will break even when it sells $1,000,000 worth of widgets.
c) At its breakeven point, the company's fixed costs will still be only $1,000,000.
d) The company will break even when it sells $2,500,000 worth of widgets.
a) The breakeven point for the company occurs when it sells 500,000 units. At 1,000,000 units sold, the company would incur a profit of $1,000,000.
b) The company will break even when it sells $1,000,000 worth of widgets.
c) At its breakeven point, the company's fixed costs will still be only $1,000,000.
d) The company will break even when it sells $2,500,000 worth of widgets.
The correct answer is: b)
The
breakeven point can be derived as follows:
(Sales price per unit)(x)  (Variable cost per unit)(x)
 Fixed Costs = 0
Where (x) is the number of units sold.
Substituting for all the variables, we get:
5x  3x 1,000,000 = 
0  
x = 
500,000 units 
For 1,000,000 units sold, we can use the same equation as follows:
(5) (1,000,000)  (3) (1,000,000)
 1,000,000 = 
Profit  
$1,000,000 = 
Profit 
CFA Level 2 2005 LOS: 8.1.E.f
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