Give a realworld example of where a business would have a ne

Give a real-world example of where a business would have a need to find a break-even or equilibrium point.

Solution

Here is a bus company which opreates a volume of kilometres.

The cost per kilometer is around 30 units on account of fuel tyre and depreciation etc which are direct cost (depending on kilometres).

There is a fixed over head cost on account of personnel, rent and cost of money , which works out to 60000 per bus per month.

The average earning per kilometre is 40. The manager has to decide the break even operation by each of his bus.

Let k be the utilisation in kilometre operated by a bus in a month .

Then earning of the bus = k* earning per klimetre =40 k

Cost of operation = Direct kilometer related cost+Fixed monthly cost=30k+60000.

In order to get profit , total earning > total cost.

40 k > 30k+60000. If we solve we get break even kilometrage.

40k-30k>60000

10k > 60000

Therefore k>6000. That implies 6000 kms is the break even kilometrage for a bus. If the manager operates less than 6000 kms per bus in a month he will be in loss and he will break even at the break even kms ,6000 kms with no loss no profit. He will be in profits if he operates more than break even kilometrage.