A firm with $50,000 in fixed costs, selling price of $25 per unit, and variable costs of $5 a unit is currently operating at breakeven volume. If sales increase 100 units and costs remain the same, the firm will:
A) have a profit of $2000.
B) have a loss of $2000.
C) increase variable costs of $2500.
D) lower its total fixed costs.

Question

Quizplus · Accepted Answer

The firm's contribution margin per unit is $20 ($25 selling price - $5 variable cost). At breakeven, total contribution margin equals fixed costs. An increase of 100 units sold at a $20 contribution margin per unit results in an additional $2000 (100 units * $20) in profit, since fixed costs remain unchanged and additional sales only incur the variable cost already accounted for in the contribution margin.

A Firm with $50,000 in Fixed Costs, Selling Price of $25