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Your company has a product that sells at retail for $50.  You sell directly to the retailer (no distributor involved).  Your retailer takes a 25% markup and your company (the manufacturer) takes a 20% margin.  Your business has the following fixed costs:Office space = $20,000Salaries = $250,000Advertisements = $100,000How many units does your company need to sell in order to break even?

Question

Your company has a product that sells at retail for 50. Youselldirectlytotheretailer(nodistributorinvolved). Yourretailertakesa2550.  You sell directly to the retailer (no distributor involved).  Your retailer takes a 25% markup and your company (the manufacturer) takes a 20% margin.  Your business has the following fixed costs:Office space = 20,000Salaries = 250,000Advertisements=250,000Advertisements = 100,000How many units does your company need to sell in order to break even?

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Solution

To calculate the break-even point, we first need to determine the cost price of the product for the manufacturer.

  1. The retailer's markup is 25%, which means the cost price for the retailer is 50/1.25=50 / 1.25 = 40.

  2. The manufacturer's margin is 20%, so the cost price for the manufacturer is 40/1.2=40 / 1.2 = 33.33 (approximately).

  3. The total fixed costs are 20,000(officespace)+20,000 (office space) + 250,000 (salaries) + 100,000(advertisements)=100,000 (advertisements) = 370,000.

  4. The contribution margin per unit is the selling price for the manufacturer minus the cost price for the manufacturer, which is 40−40 - 33.33 = $6.67.

  5. The break-even point in units is the total fixed costs divided by the contribution margin per unit, which is 370,000/370,000 / 6.67 = 55,470 units (approximately).

So, your company needs to sell approximately 55,470 units to break even.

This problem has been solved

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