Question

a. Analyze the following Graph and the breakeven point and discuss how this analysis is used for decision making?

b- If fixed costs are $400,000, selling price per unit is $150, and variable cost per unit is $100, how many units must the company sell in order to earn a profit of $ 100,000?

Answer 1

A. Break-even point is the stage of where a business reaches the level of sales earning no profit and incurring no losses. It means that the income and losses both are zero. Break-even point is useful in determining the sales level at a particular price. At break-even price the company is able to recover its fixed costs along with variable cost. This point also helps in deciding about various managerial decisions like continuing with production, sales price decisions, accepting additional orders for the product, etc. If the break-even point is reached then the company may sell additional units to specific buyers even below the market price until it lies above the variable cost.

B. Units required for earning a specific amount of profit can be calculated by the following formula

No. of required units for desired profit = (Fixed Cost + Profit Amount) / Contribution per unit

So Fixed cost = $400,000 ; Profit required = $100,000 ; Contribution = Sales Price - Variable cost = $150 - $100 = $50

No. of required units for desired profit = (400000 + 100000) / 50 = 10000 Units