Question

Often a firm will calculate the break-even point for a price. That is, if we set the price at $X, then how many units will we need to sell to cover costs (that is, our break-even point). Work through the following data and questions to gain a better understanding of this approach.

QUESTIONS

Start by completing the above table under the assumption that the product will be sold for $30. (It will be easiest to use Excel to complete the table.) How many units need to be sold to break-even at a product price of $30?

Now recalculate the table under the assumption that the product will be sold for $15. How many units need to be sold to break-even at a product price of $15?

What do you think you would set first: the sales target or the price? Why?

No. of Units	Allocated Fixed Costs	Variable Cost/Unit	Total Production Cost	Average Unit Cost	Unit Price	Total Sales Revenue	Gross Profit
500	$10,000	$10
1,000	$10,000	$10
1,500	$10,000	$10
2,000	$10,000	$10
2,500	$10,000	$10

Answer 1

When Sale price per unit Is $ 30
No. of Units	Allocated Fixed Costs	Variable Cost/Unit	Total Production	Average Unit Cost	Unit Price	Total Sales Revenue	Gross Profit
			Cost
500	10,000	10	15,000	30	30	15,000	-
1,000	10,000	10	20,000	20	30	30,000	10,000
1,500	10,000	10	25,000	17	30	45,000	20,000
2,000	10,000	10	30,000	15	30	60,000	30,000
2,500	10,000	10	35,000	14	30	75,000	40,000
When Sale price per unit Is $ 15
No. of Units	Allocated Fixed Costs	Variable Cost/Unit	Total Production	Average Unit Cost	Unit Price	Total Sales Revenue	Gross Profit
			Cost
500	10,000	10	15,000	30	15	7,500	-      7,500
1,000	10,000	10	20,000	20	15	15,000	-      5,000
1,500	10,000	10	25,000	17	15	22,500	-      2,500
2,000	10,000	10	30,000	15	15	30,000	-
2,500	10,000	10	35,000	14	15	37,500	2,500

When the sale price is $ 30 the break even sales in units will be 500,

when the sale price is $ 15 the break even sales in units will be 2000.

Notes:

One approach is to pick a sale price or a series of sale prices and compute how much of the product firm will need to sell at each price to break even.

Breakeven sales volume is the amount of firm product that will need to produce and sell to cover total costs of production. This can be computed under a range of sale prices with the formula below.

Break even sales volume = Total Fixed cost divided by contribution per unit

Contribution per unit = Sale price minus variable cost (per unit)

A key concept of this formula is the Contributions Margin. Contributions margin is the selling price less the variable costs per unit, the denominator in the equation above. It is the amount of money that the sale of each unit will contribute to covering total fixed costs. The breakeven level is the number of units required to be produced and sold to generate enough contributions margin to cover fixed costs.