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Break-Even Point

Break-EvenPoint

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BREAK-EVENPOINT

Break-evenanalysis is an analysis that is used to determine when a businesswill be capable of covering all its expenses from their revenues(Friedrichsen and Cram, 2012). It entails calculating and examiningthe margin of safety based on the revenues realized and the attendantcosts. It helps determine the level of sales or level of productionneeded to cover the total fixed costs.

COST-VOLUME-ANALYSIS

Break-evenanalysis is considered as a subset of cost-volume-profit analysisused to determine the association between costs, volume of sales andprofit. This strategy emphasizes on how prices, the volume of sales,costs (variable and fixed), and product mix influence profits.Understanding the fundamental tenets of cost-volume-profit analysishelps in analyzing these factors in the business and is significantin making better decisions (Friedrichsen and Cram, 2012).

DECISIONSTO LOWER BREAK-EVEN POINT

Raisingthe price-As a manager, I would raise the prices to increase the contributionper unit, and this consequently lowers the number of units needed tobreak even.

Removingfixed costs from the system-This can be achieved by outsourcing some of the fixed costs andtransforming them into variable costs. Many non-essential costs canbe contracted from someone who then charges per unit prices, whichare lower than having the fixed costs. This enhances profitabilityprotection in case of a sales lag and shares the underperformancerisk with the outsourcing vendor. It also allows the businesstofocus on its investment on ‘good costs.’

Up-selland Cross-sell– I would create attractive product and service matches to convincecustomers to purchase the higher-end offers or additional productsand services. This will increase the average profitability percustomer and consequently lower the number of customers needed tobreak even.

LIMITEDUSE OF BREAK-EVEN ANALYSIS

Theanalysis of the break-even point is of limited importance to businessmanagers because a company cannot survive by breaking even only. Iagree with this since businesses exist to make profits and grow. Acompany must understand customers, anticipate and respond fast tomarket evolutions, attract and retain customers, and stay ahead intechnology. Breaking even alone cannot help a company to survive.The company must also stay ahead of the competition. Also, a companymust have innovative and effective marketing strategies. Knowing therequired break-even point only helps the management to know when toanticipate total coverage of costs by the revenues, but to survive inthe industry and be regarded a success, a company has to achieve alot more than just knowing and planning its break-even point.

LOWERINGBREAK-EVEN POINT

Supposinga business has fixed costs of $42,000 and variable unit cost of $11while the unit selling price is $25. If the business sells 2500 unitsthe break-even point (BEP) is given by:

BEP=fixedcosts/ (selling price-variable cost)

=42000/ (25-11) =3000

Hence,as it stands, the BEP is 3000 units.

Thereare however, various ways of lowering a break-even point. Theyinclude:

Reducingtotal fixed costs

Fixedcosts like rent and salaries need to be reduced to lower thebreak-even point. Supposing a business is to have a lower break-evenpoint of 2500 units, then the required fixed costs can be determinedby:

BEP =fixedcosts/ (selling price-variable costs)

2500 =fixedcosts/ (25-11)

Fixedcosts= 35000

Thisshows that to reduce the BEP from 3000 to 2500, the business mustlower the fixed costs to $35000 from $42000.

Increasingunit selling price

BEPcan also be lowered by increasing the products selling price. This isillustrated below:

BEP=fixedcosts/ (selling price-variable cost)

2500=4200/(selling price-11)

Sellingprice=27.80

Toachieve the lower BEP of 2500, the company has to increase its unitselling price from $25 to $27.80. However, an increase in price is inmost cases determined by market conditions. Therefore, this strategyhas to be approached carefully so as not to scare away customersaltogether.

Reducingthe variable cost per unit for the products

Reducingthe variable costs needed to make the product is another option. Tobreak even at 2500 units, the variable cost required is illustratedbelow:

BEP=fixed costs/ (selling price- variable cost)

2500=4200/(25- variable cost)

Variablecost= 8.20

Thecalculation in the break-even analysis shows that the company has toreduce the variable cost by 25.45% from $11 to $8.20 to achieve therequired BEP of 2500 units down from 3000 units.

References

Friedrichsen,L., &amp Cram, C. (2012). Newperspectives: Portfolio projects for business analysis. Mason, Ohio: South-Western.