Essay: Breakeven Analysis Example by Bill French

Sample Essay

With French revising his method of calculating the break even analysis, he will have to consider some other increase and decrease in costs. This will make the break even figures change to 2,000,000 units as the aggregate figure. The sales volume is 400,000 units for product A, 400,-000 for product B and 950,000 for product C.  The unit sales will be $6.948 as the aggregate, $10 for A, $9 for B and $4.8 for C.

In order to pay the extra dividend of $25,000, the firm has to increase the sales volume as follows; the price per unit remains at $1.2, variable cost at $0.75 while fixed costs increase to $(520,000 +25,000) =$545,000. The units to cover for this; 1.2x=0.75x+$545,000= $545,000/0.45x; x=1,211,111 units.

In order to meet the union demands of 10% increase in production costs, it follows that the total variable costs will have to increase by 10% since production costs are in the variable costs category. The calculation of the break even units will be; 1.2x=0.75x+0.1x+$525,000= $525,000/0.35x; x=1,500,000 units.

In order to meet the union demands and pay for the extra dividends, the break even point will be; 1.2x=0.75x+0.1x+$525,000+$25,000= $545,000/0.35x; x=1,557,142 units.

With the break even analysis, the firm will easily make a decision on whether to alter the existing products. It is true with the alterations, the sales volume has to increase and if the firm finds that it is not possible to make the extra sales, it will have to stop with the alterations. For instance, it is planned that there is extra investment on the C product which will mean an increase in costs. Since the firm’s capacity is thought to be at the maximum, it will not be possible to make the increased investment.

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