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18 July, 12:23

Outdoor Gourmet Inc. sells gas grills for $275 each. The contribution margin ratio is 40%. If Outdoor Gourmet needs to sell 12,000 units to break even, then the firm's fixed costs are

A : $1,980,000.

B : $1,320,000.

C : $2,240,000.

D : $3,300,000.

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  1. 18 July, 12:48
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    B : $1,320,000.

    Explanation:

    First, calculate variable cost per unit using Contribution margin (CM) ratio;

    CM ratio 0.40 = (Sales-total variable cost) / sales

    Sales = 275*12000 = 3,300,000

    0.40 = (3,300,000-VC) / 3,300,000

    Multiply both sides by 3,300,000 to get;

    (0.40 * 3,300,000) = 3,300,000-VC

    1,320,000=3,300,000-VC

    VC=3,300,000-1,320,000

    VC = $1,980,000; meaning VC per unit = 1980000/12000 = $165

    Next, use Breakeven formula to calculate Fixed Costs (FC);

    Breakeven (BE) = Fixed cost / (Price-VC)

    12000=FC / (275-165)

    12000=FC / 110

    Multiply both sides by 110

    12,000 * 110 = FC

    Fixed Costs = $1,320,000
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