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.

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 =
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 =
$1,000,000 =

CFA Level 2 2005 LOS: 8.1.E.f


  1. Mike is a highly compensated employee of XYZ Company, his company has offered him ...

    The correct answer is b): One of the most common types of nonqualified retirement plans is the deferred compensation plan. ...
  2. The Chairman of Bright Star Life and Casual had a meeting with his broker this afternoon ...

    The correct answer is b) Insider trading would include information that is material and non-public. Certainly, a poor earnings ...
  3. Which of the following steps is inaccurate with respect to calculating a figure for ...

    The correct answer is c. Depreciation is added back to net income only when calculating for cash flow. In the case of shareholder's ...
  4. An investor owns 100 shares of LKI at $58. He needs to limit his loss to 5 points ...

    Free info on financial certification exams including study guides, exam questions, and much more!
  1. No results found.

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center