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In Marketing, the break-even point refers to the revenues necessary to cover a company's total amount...

In Marketing, the break-even point refers to the revenues necessary to cover a company's total amount of fixed and variable expenses during a specified period of time. The revenues could be stated in dollars and in units (i.e., the number of units of products sold). Thus, in a break-even pricing analysis, firms can calculate how many units of products need to be sold at a given price to break even. You may also read the discussion about target return pricing in Chapter #11 to find details about such an analysis, because break-even pricing is a special case of target return pricing (i.e., the target return is 0). Please apply the break-even pricing analysis to the scenario regarding Swift Delivery below.

Swift Delivery currently delivers packages for $9 each. The variable cost is $3 per package, and fixed costs are $60,000 per month. Please conduct a break-even analysis under each of the following independent assumptions.

  1. The costs and selling price are as just given. How many packages need to be delivered each month so that the company can break even? (5 points)

  2. The costs and selling price are as just given. How many packages need to be delivered each month so that the company can earn $30,000 in profit? (5 points)

  3. Fixed costs are increased to $75,000. How many packages need to be delivered each month so that the company can break even? (5 points)

  4. Selling price is increased by 10% (Fixed costs are still $60,000). How many packages need to be delivered each month so that the company can break even? (5 points)

  5. Variable cost is increased to $4.50 per unit (Fixed costs are $60,000 and selling price is $9). How many packages need to be delivered each month so that the company can break even? (5 points)

    Please also comment on why the break-even points are different (5 points)

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Answer #1

Break even packages = Fixed costs/(Selling price per Package – Variable cost per package)

= 60,000/(9-3)

= 10,000 packages

Number packages required to be sold = (Desired Profit + Fixed costs)/Contribution Margin per unit

= (30,000+60,000)/6

= 15,000 units

Break even packages = 60,000/(9.9-3)

= 8,695.65 packages

Break even units = 60,000/(9-4.50)

= 13,333.33 packages

Break even points are different as the contribution margin and fixed costs are changing i.e. costs or revenues are changing

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