Question

It is very important to understand various terms associated with the calculation of break-even. Let’s practice understanding this terminology by assuming that you own a dog grooming business. You will use the dog grooming service as a basis when answering the following questions; this assignment does not pertain to the health care business that you are creating for this class:

1. Research the concept of the break-even point. Why is it important for you to know how many dogs must be groomed each week in order for you to reach your break-even point? What would be the effect if you did not know this number? (4 points)

2. Research the concept of fixed costs. Give two examples of fixed costs for your dog grooming service. (4 points)

3. Research the concept of variable costs. Give two examples of variable costs for your dog grooming service. (4 points)

4. How are the fixed costs and the variable costs in your business affected by changes in productivity levels? What might you do to reduce both the fixed and variable costs as the owner of the dog grooming service? (6 points)

Answer 1

1. Break even point is the point at which the business is at no profit , no loss. It is important to know this point as it is the minimum number of Dogs that should be taking the grooming service monthly or yearly so as to cover the fixed costs of the business.

It would make it difficult to estimate what should be the pricing of the grooming service in relation to demand to ensure that atleast the minimum amount is met.

2. Fixed costs are those costs that do not fluctuate with the change in the number of units produced or services provided. These costs are unavoidable Any company, while carrying out business should ensure that these costs are met by their business to avoid running into losses.

EG :- Rent , Insurance , Advertising , Salaries etc

3. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases.

Eg of Variable cost for Dog groomers - Shampoo , Coat conditioner , Pet cologne , Dog treats , Hair ribbon

4. Fixed costs do not change with change in productivity levels (unless if its more than 100%). Variable costs change proportionately with the change in the productivity levels.

Fixed costs can only be reduced with time - For ex Savings in advertisement cost , removal of unnecessary staff , negotiation with landlord for rent , etc

Variable cost can be reduced by buying from a better dealer who is offering lower prices , buying in bulk to reduce per unit cost.