Sanderson sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-even volume, profit will be:
A) $15.
B) $20.
C) $50.
D) an amount that cannot be derived based on the information presented.
E) an amount other than $15, $20, or $50 and one that can be derived based on the information presented.

Question

Quizplus · Accepted Answer

To calculate the breakeven volume, we need to find out how many units Sanderson needs to sell to cover its total costs, which include both fixed and variable costs.

Breakeven volume = Total Fixed Costs / (Price - Variable Cost)

Breakeven volume = $5 / ($50 - $30) = 0.5

This means that Sanderson needs to sell at least 1 unit to reach its breakeven volume (since it cannot sell half a unit).

If Sanderson sells one unit, its profit will be: 
Profit = Revenue - Total Costs 
Profit = $50 - ($30 + $5) = $15

If Sanderson sells one unit in excess of the breakeven volume, its profit will increase by the unit contribution margin, which is $20 ($50 - $30). Therefore, Sanderson's profit will be: 
Profit = $15 + $20 = $35

Since the question is asking for the profit when Sanderson sells one unit in excess of the breakeven volume, the answer is B) $20.

Sanderson Sells a Single Product for $50 That Has a Variable