Question

 

Give an example from your own experience where you used a break-even point analysis. What parameters were necessary to find the break-even point? Please include your break-even calculations based on the equation from page 8 in the textbook. Or Create your own probability problem. Define what type of probability problem you have and show the best approach to solving the problem..

 

Answer 1

The instructor was correct in this case.

In your case, the fixed price is not clear because fixed price is something that is always fixed and it doesn't matter how much quantity you purchase, it always remains fixed.

In you case, the fixed cost that you have shown is 4.5 USD... But it is not a fixed cost because this is only for one shirt. If you make say 5 shirt in this case, then it will increase to 5*4.5 = 22.5 USD. But fixed cost can't increase it should be fixed nevertheless how much you manufacture.

Let me give you an example...

suppose you have a factory that you have taken for rent say 1000 USD per month. The factory has 1 machine now and hence the electricity bill is say 45 USD/month. So, total cost = 1000 + 45 = 1045 USD/month. If if you increase the count of a machine, say now its 2... Now the electricity that is required is twice in order to run two machine simultaneously.... So, the electricity bill in this case will be 90 USD. So, total cost will be 1090 USD. Here rent is fixed as it doesn't matter how much machine you accommodate in the factory, the rent is always fixed. But on the contrary, the rent is variable.

You can make your problem like this...

say you have taken a factory for rent say 1000 USD/month and the cost of raw material per shirt is say 6 USD.

The other cost per unit of a shirt that you will manufacture will be  $5.50 ($3.50 per t-shirt, taxes, shipping and $2.00 per logo print).

Kindly note that the raw material cost is also a variable cost as the more you purchase the more you need to pay.

Suppose you are planning to make 100 shirts in a month.

So,

Total cost of manufacturing = 6*100 + 5.5*100 = 1150 USD/month

Rent = 1000 USD/month

Total Cost = 2150 USD/month

Now say for every shirt you want to make a profit of 1 USD, so for 100 shirt, it will be 100 USD

So Cost Price + Profit = 2150 + 100 = 2250 USD

So Selling Price/Shirt = 2250/100 = 22.5 USD...

Here, rent is fixed and all the other costs are variable...