Question

Discuss some of the practical applications of the Breakeven Analysis concept for an entrepreneur planning to start a retail store.

Answer #1

Many entrepreneur makes the mistake of launching their full product or services in the market without totally understanding the total cost involved and prices they can charge from the customers for their product. As a consequence, they realize that they can't sell enough product without making required profits. Here, the most important tool that can be used is Break even analysis. It is a simple way to determine at what price the product should be sold in the market to make a particular level of profit.

Things to keep in mind:

1. Each business has a certain fixed cost that needs to be paid every month whether or not sales take place.

2. Each business has a variable cost that is incurred when the product is produced or sold.

3. There are some semi-variable cost that goes up and down depending upon the business activities.

Here is an example to explain the concept:

The total costs of operating the business each month are $30,000. Each product produced by the company can be sold for $1,000. Average cost of each product is $800 per unit to produce, sell and deliver. The profit per unit is therefore $200 each. The amount $200 is divided into $20,000 to determine the break-even point. Next, $20,000 divided by $200 equals 100 units. The company must therefore sell 100 units per month to break even.. Only after the company has sold 100 units in one month does it begin to earn a profit of $200 per unit.

Conducting a break even analysis requires a careful study of costs and prices of your business. To start with it, analyse every product produced or sold on a regular basis. Calculate the average sale price per unit and then the cost the total cost per unit. After that, calculate the net profit that you make on sale of per unit, and calculate the cost of the investment to produce and sell per unit., and determine the percentage of return/profit that you make/earn from the sale of per unit.

The analysis should be done on every product/ service produced and provided. Get started by determining:

- Your single most profitable product or service.
- The volume of sales of each and every product.
- The total profit of each unit of product sold, after deducting every direct and indirect expense.
- The total profit contribution of each product to the company.

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