Question

1. Company PVFV sells shoes at an average price of $100. The cost to produce each pair of shoes is $40. The company has annual fixed costs of $40,000.

Four questions:

1. What is the breakeven in terms of unit sales? Show calculations using 2 different methods.
2. Include a written description of how the two methods approach the problem.
3. What is the breakeven in terms of sales revenue?

Answer 1

a)	Break Even- By formula Method
	Break Even Units = Total fixed cost / contribution margin per unit
	=40000 / (100-40)
	667	Units
	Break Even- By Equation Method
	Let the sales unit be x
	Total sales - variable cost - fixed cost = 0
	100 x - 40 x - 40000 = 0
	Solve for x, we get
	X = 667
	Break even = 667 Units
b)	Formula method is a short and easy to use and derived from the variaous components like sales, variable cost, contribution margin per unit.
	However equation methos a long way to compute the break even, under this we need to assume the no. of units and equate it with zero, because at breakeven level profit is always 0
c)	No. of units of sales unit * Sales price
	=667*100
	66700	or 66667