Question

Discuss some of the practical applications of the Breakeven Analysis concept for an entrepreneur planning to start a retail store concept for an entrepreneur planning to start a retail store.

Answer 1

For a retail store there will be two kinds of costs:

1. Fixed costs: these costs are fixed and incurred irrespective of the sale. For example, land or rental of retail shop, maintenance, utilities expenses, administrative and salaries expenses, merchandizing and other costs which are fixed.

2. variable cost: this is the cost of products which are being sold, they are incurred per unit of sale.

revenue is the per unit sale of products.

for breakeven:

revenue = variable cost + fixed cost

revenue = price * quantity

variable cost = cost price * quantity

Now from the formula:

price * quantity = cost price * quantity + fixed cost

Hence, if fixed cost is very high, quantity to be sold will be also very high to breakeven.

the margin between the price and cost price should not be less elese the quantity to be sold for breakeven will again be very high.

determinig the breakeven, will help in understanding the profitability of the business, and how much time will it take to break even in the business and with this we can understand if it is worth venturing into the retail shop.