CIPS L4M8 Procurement And Supply In Practice · Free Practice Question Medium
Question 1
Peter works as the sales manager of Company A, a microphone manufacturer. He has calculated the fixed costs of running the company, which include property taxes, a lease, and executive salaries. These fixed costs amount to $200,000 per year. The company also has variable costs, which depend on the number of microphones produced. Each microphone costs $10 to make and is sold at a premium price of $25. Peter wants to find out how many microphones the company needs to sell in order to break even.
Calculate the break-even point of company A.
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Explanation
Break-even analysis is a concept that applies to economics, business, and cost accounting. It describes the situation where total costs and total revenue are the same. A break-even point analysis helps to find out how many units or how much revenue is required to pay for all the costs (both fixed and variable costs).
What is the Break-Even Analysis Formula?
The formula for break-even analysis is as follows:
Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit)
where:
Fixed Costs are costs that do not change with varying output (e.g., salary, rent, building machinery)
Sales Price per Unit is the selling price per unit
Variable Cost per Unit is the variable cost incurred to create a unit
In the scenario, break-even point = 200 000 / (25-10) = 13 333, 33 (units)
This means that Company A needs to sell 13,334 microphones (rounding up to the nearest whole number) in order to break even. If the company sells more than this number, it will make a profit. If it sells less, it will incur a loss.
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