Question

Bob is considering opening a bakery that will sell a single type of bread. He is working on a business model and wants to discover whether this venture is financially viable – and when it would become profitable. Here is a breakdown of his financials:

Fixed costs (monthly)		Variable costs (per loaf)		Selling price (per loaf)
Rent	$2,500	Flour	$0.50
Insurance	$250	Water	$0.25
Utilities	$250	Salt	$0.10
Advertising	$500	Yeast	$0.15
Total	$3,500	Total	$1	Total     $5	$5

Using the break-even point formula, he wants to calculate the number of loaves the bakery will need to sell each month in order to cover all expenses.

1. Calculate the break-even point.

2. Assume Bob’s bakery sold 700, 750, and 900 loaves during the first three months respectively. What is the total profit or loss did the bakery make in each of the three months?

3. Assume Bob has an objective of making an annual profit of $6000 during the first year, how many loaves does he need to sell to reach that objective?

Answer 1

1. Calculate the break-even point.
Break-even point
= Fixed cost / (Selling price - Variable cost)
= 3,500 / (5 -1)
= 875 loaves

2. Assume Bob’s bakery sold 700, 750, and 900 loaves during the first three months respectively. What is the total profit or loss did the bakery make in each of the three months?

	700 loaves	750 loaves	900 loaves
Sales	3,500	3,750	4,500
Less: Variable expenses	700	750	900
Contribution Margin	2,800	3,000	3,600
Less: Fixed costs	3,500	3,500	3,500
Operating Income (Loss)	(700)	(500)	100

3. Assume Bob has an objective of making an annual profit of $6000 during the first year, how many loaves does he need to sell to reach that objective?
= [Fixed cost + Target profit] / (Selling price - Variable cost)
= [(3,500*12) + 6,000] / (5 -1)
= 12,000 loaves