Question

Discuss the importance of a break even point in business. Provide an example of where this may be used. Give a revenue and cost function that illustrates the example. What is the profit?

Answer 1

Break even point can be considered as a very important condition while doing any business and this is because of the fact that break even level of output determines to what extent you have to sell in order to recover your total cost as a result of which you can determine the pricing method and the amount of customer base you require so that the strategy can be implemented accordingly such that if your break even level of output is low then your require customer base is low so that you can price your product high.

For example consider your fixed cost is 10000 dollars and the variable cost of production is $5 for you and if you price the product $10 what would be the break even level

The total revenue is 10Q and total cost is equal to total fixed cost + total variable cost= 5Q +10000

BREAK EVEN LEVEL TOTAL REVENUE = TOTAL COST

10Q = 5Q +10000

Q= 2000 units therefore if you price your product $10 then you have to sell 2000 units and similarly if the price increases the break-even level decreases and this is dependent on your strategy and capacity and always at the break-even level the profit is zero because the total revenue = total cost