Question

1. How much profit or loss determines the break-even point, EBIT?

2. Jimmy sells gadgets for $40 each. Jimmy’s fixed costs are $2000. Jimmy’s variable costs are $ 20.

Answer 1

Answer-

Q 1)

The break-even point determines no profit and no loss.

The breakeven level of EBIT occurs when the capitalization plans result in the same EPS. The EPS is calculated as: EPS = (EBIT – Ip ) / Shares outstanding.

Where

Ip - interet payment

Q 2)

Given

Fixed cost = $ 2000
Variable cost = $ 20

Selling price of each gadget = $ 40

Let P be the number of gadgets sold for break even

Break even point is

Selling cost x number of gadgets = Fixed cost + Variable cost

Variable cost = number of gadgets sold x variable price per gadget = $ 20 x P

$ 40 x P = $ 2000 + $ 20 x P

$ 40 P = $ 2000 + $ 20 P

$ 40 P - $ 20 P = $ 2000

$ 20 P = $ 2000

P = 2000 / 20 = 100

Therefore the number of gadgets that needs to be sold by Jimmy for break even is 100.