Often a firm will calculate the break-even point for a price. That is, if we set
ID: 2329045 • Letter: O
Question
Often a firm will calculate the break-even point for a price. That is, if we set the price at $X, then how many units will we need to sell to cover costs (that is, our break-even point). Work through the following data and questions to gain a better understanding of this approach.
QUESTIONS
Start by completing the above table under the assumption that the product will be sold for $30. (It will be easiest to use Excel to complete the table.) How many units need to be sold to break-even at a product price of $30?
Now recalculate the table under the assumption that the product will be sold for $15. How many units need to be sold to break-even at a product price of $15?
What do you think you would set first: the sales target or the price? Why?
No. of Units
Allocated Fixed Costs
Variable Cost/Unit
Total Production
Cost
Average Unit Cost
Unit Price
Total Sales Revenue
Gross Profit
500
$10,000
$10
1,000
$10,000
$10
1,500
$10,000
$10
2,000
$10,000
$10
2,500
$10,000
$10
No. of Units
Allocated Fixed Costs
Variable Cost/Unit
Total Production
Cost
Average Unit Cost
Unit Price
Total Sales Revenue
Gross Profit
500
$10,000
$10
1,000
$10,000
$10
1,500
$10,000
$10
2,000
$10,000
$10
2,500
$10,000
$10
Explanation / Answer
When the sale price is $ 30 the break even sales in units will be 500,
when the sale price is $ 15 the break even sales in units will be 2000.
Notes:
One approach is to pick a sale price or a series of sale prices and compute how much of the product firm will need to sell at each price to break even.
Breakeven sales volume is the amount of firm product that will need to produce and sell to cover total costs of production. This can be computed under a range of sale prices with the formula below.
Break even sales volume = Total Fixed cost divided by contribution per unit
Contribution per unit = Sale price minus variable cost (per unit)
A key concept of this formula is the Contributions Margin. Contributions margin is the selling price less the variable costs per unit, the denominator in the equation above. It is the amount of money that the sale of each unit will contribute to covering total fixed costs. The breakeven level is the number of units required to be produced and sold to generate enough contributions margin to cover fixed costs.
When Sale price per unit Is $ 30 No. of Units Allocated Fixed Costs Variable Cost/Unit Total Production Average Unit Cost Unit Price Total Sales Revenue Gross Profit Cost 500 10,000 10 15,000 30 30 15,000 - 1,000 10,000 10 20,000 20 30 30,000 10,000 1,500 10,000 10 25,000 17 30 45,000 20,000 2,000 10,000 10 30,000 15 30 60,000 30,000 2,500 10,000 10 35,000 14 30 75,000 40,000 When Sale price per unit Is $ 15 No. of Units Allocated Fixed Costs Variable Cost/Unit Total Production Average Unit Cost Unit Price Total Sales Revenue Gross Profit Cost 500 10,000 10 15,000 30 15 7,500 - 7,500 1,000 10,000 10 20,000 20 15 15,000 - 5,000 1,500 10,000 10 25,000 17 15 22,500 - 2,500 2,000 10,000 10 30,000 15 15 30,000 - 2,500 10,000 10 35,000 14 15 37,500 2,500Related Questions
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