Question

The subject is Applied Decision Methods.

Define break even point analysis and give an example where you used a break-even point analysis?

Answer 1

Breakeven point is the point at which the revenue becomes equal to the expense we have undergone and breakeven point analysis helps to determine the levels of sales or production that are required to overcome the cost. Total gain becomes equal to total losses in the breakeven point and the analysis helps to identify the point in which the company would start making profit. Breakeven analysis depends on the contribution margin of the product which is calculated by subtracting the variable costs from the selling price of the product. It is the amount that covers the fixed cost and makes profit. Breakeven point calculation can be made by dividing the total fixed costs by the unit contribution margin.

For example, consider a business which produces shoes with fixed cost of $10 per shoe and variable cost of $40 per shoe. The selling price is fixed at $90. The contribution margin would 90-40 = $50. The total fixed costs of the company are $25000. Then the breakeven point becomes $25000/50 = 500. The shoe manufacturer would be able to meet the expense with revenue and start making profit once he sells 500 units of shoes.