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The document discusses break-even analysis for businesses with both fixed and variable costs. It provides an example of calculating the break-even point for a frame shop with $28,000 in fixed costs and $30 in variable costs per unit, where the break-even point is 700 units. The document also presents a case study on guitar manufacturer Washburn and calculates the break-even point for a new line of guitars with different proposed retail prices.

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Amit Kumar
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96 views3 pages

B

The document discusses break-even analysis for businesses with both fixed and variable costs. It provides an example of calculating the break-even point for a frame shop with $28,000 in fixed costs and $30 in variable costs per unit, where the break-even point is 700 units. The document also presents a case study on guitar manufacturer Washburn and calculates the break-even point for a new line of guitars with different proposed retail prices.

Uploaded by

Amit Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Break–Even Analysis with Variable & Fixed Costs

Break even analysis is a technique that analyzes the relationship


between total revenue and total cost to determine profitability at
various levels of output. The break-even point ______ is the quantity
at which total revenue and total costs are ______. Profit comes from
any units sold beyond the BEP. The simple break-even formula
discussed yesterday assumes total costs are equal to variable costs.
In reality businesses have fixed and variable costs.

Total costs:

Fixed costs:

Variable costs:

When including variable and fixed costs, the break-even point (BEP) is
calculated as follows:
Example:
Assume the owner of the frame shop wanted to identify how many
pictures must be sold to cover fixed costs at a given price. Also
assume that the average selling price is $100 and the fixed cost for
the business is $28,000 (for real estate rental, interest on bank loans
and other fixed expenses) and unit variable cost (UVC) for a picture is
$30 (for labour, glass, frame and matting). Based on these numbers,
what is the BEP?

Based on the BEP, any amount sold below _____ pictures results in
the frame shop losing money and any amount more than _____
pictures results in a __________.

Calculate the profit based on each of the following number of picture


frames sold:
Quantity Selling Total Unit Total Fixed Total Profit
Sold Price Revenue Cost Variable Cost Cost (TR-TC)
Cost (FC) (TC)
(TVC)
O $100
200 $100
400 $100
600 $100
800 $100
1,000 $100
1,200 $100

1. What is the break-even point if the selling price is $75? What if it is


$125?

2. What is the relationship between selling price and the BEP?

3. What is the break-even point when the unit cost is $25 but the
selling price remains at $100? What if unit cost is $35?

4. What is the relationship between unit cost and/or total cost and
BEP?
Example #2 - Wasburn Guitars Break-Even Case Study

Washburn is one of the most prestigious guitar manufacture offering


instruments that range from one of the kind, custom made acoustic
and electric guitars and basses to less expensive, mass produced
guitars.

Bill Abel, Washburn’s vice president of sales, is responsible for


reviewing and approving prices for the company’s line of guitars.
Setting a sales target of 2000 units for a new line of guitars, he is
considering a suggested retail price of $349 per unit for customers at
one of the hundreds of retail outlets carrying the Washburn line.

Looking at Washburn’s financial data for its present plant, Abel


estimates that the line of guitars will have the following fixed costs:

Rent and taxes = $14,000


Equipment = $4,000
Management & quality control program =$20,000

In addition, he estimates the variable costs for each unit to be:


Direct materials = $25/unit
Direct labour = 15 hours/ unit @ $15/ hour

Question:

In Washburn’s factory, what is the break – even point for the new line
of guitars if the retail price is: a) $349 b) $389 and c) $309

Also, (d) if Washburn achieves the sales target of 2000 units at the
$349 retail price, what will its profit be?

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