Homework SourseWrite an explanation of the breakeven point for the owners I
| Write an explanation of the breakeven point for the owners |
| Include the following:- |
| 1.* Explanation of Breakeven Point (what it is used for and how it assists business owners) |
| 2.* An Explanation of the various types of costs (with examples) and their effect on the Breakeven point. |
| 3.* The differences between the terms of the ‘breakeven point’ and ‘living costs’. |
| Write an explanation of the breakeven point for the owners |
| Include the following:- |
| 1.* Explanation of Breakeven Point (what it is used for and how it assists business owners) |
| 2.* An Explanation of the various types of costs (with examples) and their effect on the Breakeven point. |
| 3.* The differences between the terms of the ‘breakeven point’ and ‘living costs’. |
Solution
1.*
Breakeven point (BEP) defines the level/volume of production where total costs of the company equals to total sales revenue. This is situation of no loss, no profit. BEP is helpful in management decisions like:
1. Determinantion of point of profibility
2. Price determination/change decision
3. Make or buy decisions
4. Change in product line
5. Expansion/Shut down decisions
2. *
There are two type of costs:- 1. Variables costs 2. Fixed costs
Effect of change in costs results in change in BEP, a example is shown as below for reference:-
| Per unit | |||
| Sales | $ 10.00 | $ 10.00 | $ 10.00 |
| Less: Variable Cost | $ 6.00 | $ 7.00 | $ 7.00 |
| Contribution Margin (Sales-VC) | $ 4.00 | $ 3.00 | $ 3.00 |
| Fixed Cost | $ 50,000.00 | $ 50,000.00 | $ 40,000.00 |
| BEP in unit = Fixed Cost/Contribution per unit | 12500.00 | 16666.67 | 13333.33 |
