Business Studies – 4.4.3 Break-even analysis | e-Consult
4.4.3 Break-even analysis (1 questions)
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1. Calculate the initial break-even point in units:
Break-even point (units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
Break-even point (units) = £50,000 / (£50 - £30)
Break-even point (units) = £50,000 / £20
Break-even point (units) = 2500 units
2. Calculate the new break-even point in units:
New Break-even point (units) = Fixed Costs / (Selling Price per Unit - New Variable Cost per Unit)
New Break-even point (units) = £50,000 / (£50 - £35)
New Break-even point (units) = £50,000 / £15
New Break-even point (units) = 3333.33 units (approximately 3334 units)
3. Impact on profitability:
- Increasing the variable cost per unit from £30 to £35 will worsen the company's profitability.
- The break-even point increases from 2500 units to approximately 3334 units. This means the company now needs to sell more units to cover its costs.
- With a higher variable cost, each unit sold contributes less to covering fixed costs.
- Therefore, the company will need to sell a larger volume of products to achieve the same level of profitability as before. This could be challenging if demand remains constant.
- The company might need to increase its selling price to compensate for the higher variable cost and maintain profitability. However, this could impact sales volume.