Spencer Tools would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment. The fixed costs are estimated at $27,400, the depreciation expense is $1,700, and the contribution margin per unit is $6.75. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?
A) 3,220 units
B) 4,059 units
C) 2,815 units
D) 4,233 units
E) 4,658 units

Question

Quizplus · Accepted Answer

To ensure the potential loss does not exceed the initial investment, the firm needs to cover both fixed costs and depreciation. The total costs are $27,400 + $1,700 = $29,100. Dividing this by the contribution margin per unit ($6.75) gives the minimum number of units: $29,100 / $6.75 = 4,059 units.

Spencer Tools Would Like to Offer a Special Product to Its