Question

In a marginal/differential analysis, I have two decision options available for the upcoming year:

1. Keep open my existing arcade business only and not expand, or 2. expand business by opening a second location across town

If opened, the second locaiton's staff wages would be the same percentage of sales as the original location. The opening of the second location is estimated to result in a 15% increase in sales for the original location.

Question...

I have calculated the breakeven point (in units). If I multiply the breakeven by the price per unit, is that number supposed to cover my variable expenses, or my fixed expenses? How do I use that breakeven info. to determine if the decision to expand is good or not?

Answer 1

Solution:-

If I multiply the breakeven by the price per unit, is that number supposed to cover my variable expenses, or my fixed expenses:-

If you multipy beakeven by the price per unit than resulted amount will cover both variable and fixed expenses.

How do I use that breakeven info. to determine if the decision to expand is good or not:-

A break-even analysis is a very useful tool if you are starting up a new business, planning to expand your existing business or even thinking about a new advertising or marketing campaign. Simply put, it can help you understand whether your next big decision will help you realize your dreams or be the beginning of the end for your business.

Once you know what your variable costs are, as well as your overall fixed costs for your business, you can determine your break-even point: the volume of sales needed to at least cover all of your costs. A break-even analysis also enables you to compute a new break-even point that you’d need to meet if you decided to increase your fixed costs (for example, if you underwent a significant new expansion project or bought some new office equipment.)