Question

Part A: Explain the concept of break-even analysis in relation to pricing strategy. Part B: Given the following information, answer the questions below. Be sure to show your calculations. Selling Price/Unit = $46.00 Variable Cost/Unit = $21.14 Total Fixed Cost = $18,178.00 1) What is the yearly breakeven point in units for the Lucky Brand Beaded Bracelet? 2) Assuming that Lucky Brand Designs distributes its bracelets through 30 retailers, is this breakeven point feasible? Provide a yes or no answer and your reasoning. Assuming that your answer is ‘No’, what advice would you provide to Lucky Brand? 3) What is the breakeven point in dollars for the Lucky Brand Beaded Bracelet? 4) Assume that the producers of the Lucky Brand Beaded Bracelet wanted to earn a profit of $24,000 for the year. What is the target profit breakeven point in units?

Answer 1

Part A:

At breakeven point the revenue generated is equal to total cost, the company is at a position where there is no profit no loss.

Let, Q = breakeven volume

V = unit variable cost

F = fixed cost

S = unit selling price

Total Cost = Fixed cost + Total variable cost = F + V*Q

Total Revenue = Quantity x unit revenue = S*Q

At breakeven point, Revenue = cost

(Q)(S) = F + (Q)(V)

Breakeven volume = Q = F/(S – V)

S – V = unit contribution margin (CM)

Breakeven volume = Q = F/CM

Part B:

Let, Q = breakeven volume

V = $21.14 per unit

F = $18,178.00

S = $46.00 per unit

Part B. 1:

Breakeven point volume = QB = F/(S – V)

CM = S – V = $46 – $21.14 = $24.86          

Breakeven point volume = QB = 18,178/(46 – 21.14)

Breakeven point volume = QB = 731.21 units

Part 2: Not sure, required some more information

Part 3:

Breakeven point in dollars = S x QB = $46 x 731.21 units = $33,635

Breakeven point in dollars = $33,635.88

Part 4:

The profit given as follows:

Let QP = quantity for desired profit level of P

Profit = P = Revenue – total cost = S*Q - (F + V*Q) = (S – V)*Q – F

P = (S – V)*Q – F

Q = P + F /(S – V) = P/CM + F/CM = P/CM + QB

For desired Profit of $24,000, the Breakeven point volume is given as:

QP = $24,000 / 24.86 + 731.21

QP = 1696.61

For desired profit of $24,000, the breakeven volume is 1696.61 units