Question

After reading Chapter 5 and reviewing the online videos you should have a good grasp on break-even analysis, target profit analysis, margin of safety, degree of operating leverage, and sales mix. For this discussion, I'd like you to give me a real life scenario where you either have used or have been involved in others using one of the tools discussed above. If you have yet to ever see or use break-even, target profit analysis, margin of safety, degree of operating leverage, sales mix, etc., you may well be in the majority and not the minority, and that's OK. Instead then, think of a scenario that you could have applied these concepts to from your real life and discuss what that might have looked like. As an example...if you delivered pizza one summer, you incurred fixed costs and variable costs you had to cover for your job. You could prepare an analysis to determine break-even for wages or wages to earn a target income, etc. What would be the components of such an analysis?

Answer 1

Example:- Suppose, I delivered pizza one summer and incurred fixed costs and variable costs for the job.

Say the fixed costs for my delivery job was $1,200 to purchase a bike which I use for the delivery and say the variable costs is $2 for every kilometer I run the bike for delivery. Also lets take I get a earnings of $5 for every kilometer of delivery job.

Here, the components of this analysis are Total Fixed Costs and Contribution Margin per Km.

To calculate the Break even for wages, the equation is given by:-

Break Even Wages = Total Fixed Cost / Contribution Margin Per Kilometer

Here, Total fixed cost is given as $1,200

Contribution Margin per Km = Revenue per Km - Variable cost per km

= $5 - $2

= $3 per Km.

Therefore, Break even for wages = $1,200 / $3

= $400 is the wage to achieve a break even.