You have been asked to calculate the break-even point for a new line of souvenir T-shirts. The selling price will be $25 per shirt. The labor cost is $5 per shirt. The administrative costs of operating the company are estimated to be $60,000 annually and the sales and marketing expenses are $20,000 a year. Additionally, the cost of materials will be $10 per shirt. What is the break-even quantity?

$8,000 shirts

Explanation:

The formula to compute the break even quantity is shown below:

= (Fixed expenses ) ÷ (Contribution margin per unit)  

where,  

Fixed expenses = Administrative cost + sales and marketing expenses

= $60,000 + $20,000

= $80,000

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $25 - $5 - $10

= $10

So, the break even quantity is

= $80,000 ÷ $10

= $8,000 shirts

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