This chapter helps you to begin understanding breakeven anal

This chapter helps you to begin understanding break-even analysis and pricing of your product in a business. So many businesses fail within the first couple of years due to their not fully understanding the true costs and pricing of their product. Suppose you have a friend who thinks they make the best pizza in the whole world and is thinking of opening a pizza parlor in town. They tell you that it only costs about $4 to make a large pizza and that they think they could charge $7 a pizza a make a killing. After a little research you determine that they would have approximately $4,000 in monthly fixed costs as well as their $6 of variable costs (they were not taking into consideration employees). What would you say to them? Address true costs, both variable and fixed, number of pizzas that they would need to sell to break-even as well as any profits that they may want to have on a monthly basis.

Solution

Calculation of Break even sales:

a. Selling price per pizza = $7

b. Variabe cost per pizza = $6 (after research)

c. Contribution per unit (a - c) = $1

Break even point (in units) = Fixed cost / Contribution per unit

= $4,000 / $1

= 4000 pizzas

Atleast 4,000 pizzas needs to be sold per month in order to cross the break-even line. Means, after selling 4,000 pizzas the business will start to see the profits.

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