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Homework 4B. 2
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Breakeven Analysis
Preparation
Review 10.3 Financial Decision Making (Links to an external site.) (specifically, the section titled, “Breakeven Analysis”).
Your Assignment
Breakeven analysis determines the volume of sales necessary for a business to cover costs (i.e., the sales volume at which revenue equals costs). It is helpful in setting prices, estimating profit or loss potentials, and planning for the coming period. A couple of formulas will be helpful for this assignment:
Breakeven point (units) = Total fixed costs / (Selling price – Unit variable cost)
Breakeven price = Unit variable cost + (Total fixed costs / Projected units)
When answering the following questions, please show your calculations (if applicable) and highlight your final answers in bold font:
- Breakeven analysis requires you to distinguish between fixed and variable costs. Fixed costs are expenses that do not vary directly with changes in production or sales volume, at least in the short-term (many fixed costs become variable in the long-term; e.g., rent may increase or decrease as you expand or reduce the size of your cafe, but rent is fixed in the short-term). Fixed costs must be paid regardless of whether sales are being generated. In contrast, variable costs are expenses that vary directly with changes in the production or sales volume.
Assuming a short-term time horizon, identify each of the following as a fixed (F) or variable (V) cost in the context of BizCafe. Copy and paste the table below into your response: Item Cost Type Advertising Coffee Cups Equipment Payroll Rent - Calculate the breakeven point (units) if fixed costs are $12,000 and you are selling coffee for $3.60 at a cost of $0.40 per cup.
- Using the same fixed and variable costs as question 2, what is the new breakeven point if the price is lowered to $2.90?
- Using the fixed and variable costs from question 2, what is the breakeven price if you project that you will sell 3,000 cups of coffee?
- How can knowing the breakeven point (units) help you with other decisions?
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