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Breakeven analysis
2
The breakeven point of a product is the point at which the business is able to cover its
expenses with nil profit. This is the point at which any additional revenue is calculated as a profit
to the business. Breakeven analysis is an important measure in business since it measure the
point of profitability. Any value above the break-even point is a profit and any amount below this
point is assumed to be a loss to the business. It is important to include that the break even
A breakeven analysis for individual units is calculated and to determine the profitability
of individual products. This will be used to show which products are profitable and which are
loss making. The products that fail to cover their production expenses are loss making and
In this case we evaluate the break even analysis for Alaska coffee which sells coffee espresso
scones and bear claws. For each product the computation of break-even units need to be
calculated individually to show the viability of each product since it is a new business. From the
Angelos tabulation we note that the business has the following fixed costs that he has to account
for
This fixed costs are part of the costs that will form the total cost of production of the four
coffee variants of the business. The business uses the apportionment method to assign the fixed
costs to the various products that are being sold. The first requirement is the break-even point of
Break even analysis is calculated by [Breakeven point = fixed costs/ (unit selling price variable
Fixed costs
a) Coffee
75% of 2700=2025
2025
2-0.25
= 1157 cups
b) Espresso
0.15% of 2700=405
405
3-0.5
=162 cups
c) Scones
Breakeven analysis
4
0.05% of 2700=135
135
=67.5 ea
d) Bear claws
0.05% of 2700=135
135
0.5
=270 ea
The next requirement was the total sales figure for the shop be at the break-even
point. At break-even total sales equals break even units multiplied by the selling price per
unit.
Coffee
1157 * 2=2314
Espresso
162*3=486
Breakeven analysis
5
Scones
4*67.5=270
Bear claws
270*1.50=405
At $3475 the business is able to meet its expenses well and any additional revenue is
The break even analysis is a good method for Angelo to develop a strategy for his
business to boost its growth over the long term. In the event that an organization's profitability is
dictated by the achievement of at least one or more items, utilizing the breakeven point for every
item will give a course of events to the organization. This can be utilized to actualize an overall
financial strategy that fits the anticipated expenses and benefits (Tsorakidis, 2011).
Angelo could improve his business by lowering his variable cost this would lead to
greater profits and would ultimately reduce the total number of units that needed to be produced
to break even. Reduction of the variable costs improves the contribution margin for each item.
Contribution margin is a cost accounting technique that enables an organization to decide the
productivity of individual items. The contribution margin can likewise refer to a for each unit
measure of an item's gross operating profit figure essentially as the item's value, short its
aggregate variable expenses. This metric will enable the business to be able to evaluate the
Breakeven analysis
6
different business products and to determine which product is performing well and which is
If Angelo reduces the variable costs for the production of the various coffee variants it
will boost increase the contribution margin and reduce the number of units needed to break even.
Some of the products for example for scones and bear claws the variable costs are very high and
this increases the number of units needed to break even. For scones a 50% variable costs to the
selling price is termed too high and should be reduced to a maximum of approximately 25% and
this will increase the contribution margin to approx. 75% which in turn lowers the total number
of units required to break even. For bear claws the variable costs are too high at $1 compared to
the selling price of about $1.50. This reduces the contribution margin to just approx. 33% which
For the other two products the coffee and espresso the current contribution margins are
okay and hence it may not require that Angelo makes any changes to the current variable costs.
Breakeven analysis
7
References
Tsorakidis, N., Papadoulos, S., Zerres, M., & Zerres, C. (2011). Break-even analysis. Bookboon.