Question

Write an explanation of the breakeven point for the owners

Include the following:-

1.* Explanation of Breakeven Point (what it is used for and how it assists business owners)

2.* An Explanation of the various types of costs (with examples) and their effect on the Breakeven point.

3.* The differences between the terms of the ‘breakeven point’ and ‘living costs’.

Answer 1

1.*

Breakeven point (BEP) defines the level/volume of production where total costs of the company equals to total sales revenue. This is situation of no loss, no profit. BEP is helpful in management decisions like:

1. Determinantion of point of profibility

2. Price determination/change decision

3. Make or buy decisions

4. Change in product line

5. Expansion/Shut down decisions

2. *

There are two type of costs:- 1. Variables costs 2. Fixed costs

Effect of change in costs results in change in BEP, a example is shown as below for reference:-

	Per unit
Sales	$          10.00	$          10.00	$          10.00
Less: Variable Cost	$            6.00	$            7.00	$            7.00
Contribution Margin (Sales-VC)	$            4.00	$            3.00	$            3.00
Fixed Cost	$ 50,000.00	$ 50,000.00	$ 40,000.00
BEP in unit = Fixed Cost/Contribution per unit	12500.00	16666.67	13333.33