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. A person whose registration has been revoked by an Administrator due to a felony ...

    The correct answer is a. The Administrator may suspend, deny or revoke registration in any capacity if the person has such ...
  2. Which of the following, under the NASD Conduct Rules, would constitute a complaint ...

    The correct answer is b. The NASD defines a “complaint” as adverse communications that are in writing. Choices I and III ...
  3. An investor has bought 25 call options on oil. The exercise price of the call is ...

    The correct answer is: a) Rule for a long call position: If at expiry, the asset price settles below the expiry price, Do ...
  4. Under the Investment Company Act of 1940, which of the following is not a formal ...

    The correct answer is d. A mutual fund is technically registered under the ’40 Act as an open-end management investment company. ...
  1. No results found.
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center