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?

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31 May, 10:03

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?

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Turner Barrett · Answer 1

4,059 Units

Explanation:

The minimum numbe of units the firm should pre-sell to ensure its potential loss does not exceed the desired level is the same as its break-even units.

The formula therefore = Fixed Costs : Contribution margin per unit.

Note:

Contribution per unit is the same as sales price - variable cost, hence it is appropriate to use this figure to calculate Break Even Units Depreciation Expense is categorised as a fixed cost because, basically, fixed assets are depreciated. Hence, $1,700 will not be deducted from the $27,400 to calculate Break Even Units Minimum Units = $27,400/$6.75 = 4,059 Units