Question

• Locate the formula for "Break-even Analysis" in units, sometimes referred to in Managerial Accounting textbooks under the chapter entitled "Cost-Volume-Profit Analysis"
• Explain each variable in the formula
• Apply the variables, i.e., explain them, as they pertain to the fictitious business model I've asked you to adopt in homework exercises and the midterm.

Answer 1

Breakeven analysis is the analysis done at the break even point.

The breakeven point is defined as the point where Total Revenue and Total Costs are equal

Hence we get:

Total Revenue = Total Cost

PQ = FC + VC(Q)

(P-VC)Q = FC

Q = FC/ (P -VC)

where Q = Breakeven quantity

P = Price of the good

FC = Fixed Costs

VC = Per unit variable cost

Here, FC = Fixed costs are the costs that a business has to take in order to run, such as the purchase of a factory or the rent of a factory irrespective of how much the good is produced

VC = Per unit Variable Costs are the costs that are dependent on the number of goods produced, like the cost of the number of raw material parts required

P = Price at which the good is sold

Q = The quantity of goods sold