Often a firm will calculate the break-even point for a price. That is, if we set the price at $X, then how many units will we need to sell to cover costs (that is, our break-even point). Work through the following data and questions to gain a better understanding of this approach.
QUESTIONS
- Start by completing the above table under the assumption that the product will be sold for $30. (It will be easiest to use Excel to complete the table.) How many units need to be sold to break-even at a product price of $30?
- Now recalculate the table under the assumption that the product will be sold for $15. How many units need to be sold to break-even at a product price of $15?
- What do you think you would set first: the sales target or the price? Why?
No. of Units | Allocated Fixed Costs | Variable Cost/Unit | Total Production Cost | Average Unit Cost | Unit Price | Total Sales Revenue | Gross Profit |
500 | $10,000 | $10 | |||||
1,000 | $10,000 | $10 | |||||
1,500 | $10,000 | $10 | |||||
2,000 | $10,000 | $10 | |||||
2,500 | $10,000 | $10 |