Q:
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 break-even 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 break-even 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 correct answer is: b)

The break-even 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

RELATED FAQS

  1. A church that a registered representative (RR) attends plans to raise the funds necessary ...

    The correct answer is c) Although church bonds are normally considered to be exempt securities, the RR is obligated, by NASD ...
  2. Which of the following statements is (are) true with respect to the calculation of ...

    The correct answer is: a) (I) is incorrect because results that cover a period of less than a year must "not" be annualized. ...
  3. Which of the following terms are associated with the purchase/redemption of open-end ...

    The correct answer is b. Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares ...
  4. Joanne Bume, CFA, is the head of research at large brokerage firm ...

    The correct answer is: a) The proper course of action would simply be to place Universal Airlines on a restricted list until ...
RELATED TERMS
  1. No results found.

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!