Chapter 1.

Break-Even Analysis

Break-Even Analysis
1. Tony Sharp is thinking seriously about whether to set up a Sports shop in his home town. Tony
has just completed a Business Plan. Tony has estimated the average price of his goods will be 8 euro with
variable costs at 6 euro, and monthly fixed costs 600 euro. Complete the table below.
Number of Products
Q: 0 100 200 300 400 500
Revenue TR 8*0=0 8*100=800
Fixed Costs FC 600 600
Variable Costs
6*0=0 6*100=600
VC
Total Costs TC 600 600+600=1200

Profit π 0-600=-600 800-1200=-400

What is the breakeven point each month?

2. John sells flowers in an open market at an average price per unit of $10 and it costs to buy from
producers with $6. The entire yearly costs for running this activity are around $25,000. How much will he
need to sell for covering the entire costs?

3. A general store located near campus area sells academic supplies, magazines, packaged food
items and canned soft drinks and fruits. The owner of the store has noticed that several pizza delivery
services make frequent deliveries, and is considering selling pizza at the store. He could buy premade
frozen pizzas and heat them in an oven. The cost of the oven and freezer would be 27,000. The frozen
pizzas cost 3.75 to buy from a distributor and to prepare (including labor and a box). To be competitive
with the local delivery services, the manager believes he/she should sell the pizza for 8.95 a piece. The
manager needs to take a decision.

a) Determine how many pizzas would have to be sold to break-even.

b) If a selling rate of 20 pizzas per day is estimated, how many days would it take to break-even?
c) If the competitors react and after the first month the manager has to lower the price to 7.95 to
keep demand at 20 pizzas per day, what will be the new break-even point?

4. Western Clothing produces denim jeans. The company incurs the following monthly costs to
produce denim jeans:
Fixed cost = 10,000$
Variable cost = 8$/pair
● If the company decides to produce 400 pairs of denim jeans and sell them for 23$/pair, calculate
the profit. At this price calculate the break-even point.
● If the company decides to maintain the volume of 400 pairs of denim jeans, calculate the price in
order to cover the total cost.
● If the stitching on the denim jeans is changed to make the jeans more attractive and stronger,
this change results in an increase of the variable costs by 4$/pair of jeans and the new sale price is of
30$/pair, calculate the break-even point.

5. A firm is selling 2 products, chairs and bar stools, each at €50 per unit. Chairs have a variable cost
of €25/chair and a bar stool has a variable cost of €20/stool. The fixed costs of the firm are €20,000.
a) If the sales mix is 1:1 (one chair sold for every bar stool sold) what is the break-even point in
volume and in value of sales?
b) If the sales mix is 1:4 (one chair sold for every four bar stools sold) what is the break-even point
in volume for each product and value?

6. In developing a product sold for 7$, an entrepreneur analysis two production processes requiring
different investment costs. Thus, the traditional/classic process requires a minimum investment of $2,000.
The cost of human resources and raw materials amounts to $5/product. The entrepreneur thinks of a

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 Chapter 1. Break-Even Analysis

second production process with automated equipment that would ensure higher productivity and reduce
variable cost at $2/product. The total investment required in this case is of $10,000.
a) Calculate the break-even points for the two situations.
b) Compare the two processes and recommend the best option (graphic and interference point).
c) For more than 2,150 pieces manufactured products, which is the best option?

7. A company sells two types of products. For the first product the company pays $9.95/piece and
sells it at $13.6/piece. For the second product the acquisition cost is of $17/unit and the price $19.7/unit.
a) If the company wishes to obtain a gross profit of $1,000 and has a firm order of 70 pieces from
the first product, how much must the company sell from the second product?
b) During the last year demand has changed dramatically, so there is no demand for the first product
and the company needs to focus only on the second product. Thus, the company’s management
analyzes the conditions established by its providers:
Supplier A: fixed cost of $1,700 for an amount of 100 products and over this level 15$/piece;
Supplier B: fixed cost of $2,000 for an amount of 100 products and over this level 10$/piece.
Which supplier should the company choose if the expected demand is of 140 products in the first half
of the year?
c) But if the demand will be of 200 products in the second half of the year?
d) Calculate the interference point for suppliers and identify the best choice for different quantities.

8. When Maria purchased Corner Laundry, she thought that a good location would automatically do a
good business if she improved the unit’s physical appearance. Thus, she invested in remodeling the
exterior and the interior of the laundry. But she just about broke even in the year following her acquisition
of the laundry. In order to improve her service unit, Maria is considering purchasing new dry-cleaning
equipment including a pressing machine that could substantially increase the speed at which she can dry-
clean clothes and improve their appearance. The new machinery costs 16,200 € (installation included) and
can clean 40 clothes per hour (or 320 items per day). Maria estimates her variable costs to be of 0.25 €
per item dry cleaned, which will not change if she purchases the new equipment. Her current fixed costs
are of 1,700 € per month. She charges customers 1.10 € per clothing item.

a) What is Maria’s current monthly volume?

b) If Maria purchases the new equipment, how many additional items will she have to dry clean each
month to break even?
c) Maria estimates that with the new equipment she can increase her daily volume reaching 4,300
items per month. What monthly profit would she realize with that level of business during the next 3
years?
d) Maria believes that if she doesn’t buy the new equipment but lowers her price to 0.99 per item,
she will increase her business volume. If she lowers her price, what will her new break-even volume be? If
her price reduction results in a monthly volume of 3800 items, what will her monthly profit be?
e) Maria estimates that if she purchases the new equipment and lowers her price to 0.99 per item,
her volume will increase to about 4700 units per month. What should Maria do?

9. Natureland makes cheese, which it sells at local supermarkets. The fixed monthly production cost
is of € 4000 and the variable cost per kg of cheese is of €0.21. The cheese sells for €0.75 per kg but the
firm’s manager is considering raising the price to 0.95. Currently, the firm produces and sells 9,000 kg of
cheese per month, but if it raises its price, sales will decrease to 5,700 kg per month. Should the manager
raise the price?

10. In 2017 the entire market of product P is of 650 Million lei, the price per piece was of 27,000 lei.
For 2018, the marketing team estimates an increase by 35% of the sales value. At the same time, the
price per piece is also expected to increase by 30%. Determine the volume and the value of the market of
P product in 2018.
An enterprise intends to launch product A in 2017 on the market of product P, at a price of 22,000
lei/unit. The enterprise estimates a variable cost of 35,000 lei/unit and a fixed cost of 26 Million lei.
Knowing that this is the only product offered by this enterprise, determine the quantity that the company
must produce and sell in order to become profitable.

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11. “Procter&Gamble” has the following details for the production mix of its 4 products:

Quantity Variable cost

Sale price Fixed cost
Product % in the m.u./unit v
Pieces m.u./unit p thousand m.u.
total
Ariel 900 30 % 1.000 450
Tide 600 20 % 600 300
Persil 300 10 % 850 500
Omo 1.200 40 % 700 240
Total 3.000 100 % 350,2

Analyze the data and establish the break-even point for the entire mix and per product. Also,
establish the safety interval.