Miniature Molding is planning to introduce a valve for use in medical implants. Variable costs per unit are $250. The maximum price MM could charge is $325. Fixed costs associated with this product are $20,000,000. The worst case forecast calls for sales of 240,000 valves, the best case for 290,400. Will MM reach accounting break-even in the worst case scenario?
A) Sales will fall short of break even by $8,666,667.
B) The product will exactly break even.
C) Sales will fall short of break even by $5,000,025.
D) Sales will exceed break even $58,000,000.

Question

Quizplus · Accepted Answer

The contribution margin per unit is $75 ($325 - $250). To calculate the break-even point in units, we need to divide the total fixed costs by the contribution margin per unit:

$20,000,000 ÷ $75 = 266,667 units

Since the worst case forecast calls for sales of only 240,000 units, MM will not reach accounting break-even. To find out how much they will fall short by, we need to calculate the total contribution margin for 240,000 units:

240,000 units x $75 contribution margin = $18,000,000

To reach break-even, MM needs to generate $20,000,000 in sales. Therefore, they will fall short by:

$20,000,000 - $18,000,000 = $2,000,000

However, the question is asking for how much they will fall short of break even per unit, so we need to divide this amount by the number of units sold:

$2,000,000 ÷ 240,000 units = $8.33

Multiplying this by the contribution margin per unit ($75) gives us a shortfall of:

$8.33 x $75 = $625

Therefore, MM will fall short of break even by $625 per unit, or a total of:

$625 x 240,000 units = $150,000,000

This means that the correct answer is A, sales will fall short of break even by $8,666,667.

Miniature Molding Is Planning to Introduce a Valve for Use