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A company has single product with selling price of $12 per unit, which is calculated as variable cost per unit, plus 20%. At an output level of 5000 units it makes a loss of $8000. What is the company’s total fixed cost?
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For every $100 variable cost, they are adding on $20 and therefore getting a selling price of $120.
Putting it the other way round, for every $120 selling price, the variable cost must be $100 and the contribution must be $20.Therefore if the selling price is $12 per unit, the contribution must be 20/120 x $12 = $2 per unit.
If they sell 5,000 units the total contribution must be 5,000 x $2 = $10,000.
Since they made a loss of $8,000 (which is the total contribution minus the fixed costs), the fixed costs must be $18,000.
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