Question

What is the breakeven quantity for producing a product? How would a higher breakeven quantity relate to

a) A company’s risk

b) Profit earned per unit sold, once a company exceeds the breakeven point?

Answer 1

Break Even Production Quantity Q is determined by the relationship:

Q = Fixed Cost of Production (FC) / ( Sale Price per unit (SP) - Variable cost of production per unit (VC))

As break even quantity goes up it is quite clear that the fixed cost goes up as the two quantities are directly proportional to each other. This in turn implies that the company has to produce higher and higher to breakeven. Higer production demand higher sales revenues which is dificult to maintain and adds to a company's risk.

Therefore, higher breakeven quantity would imply higher fixed costs to be covered, thereby adding to a company's risks.

Profit earned per unit sold also increases as the break even point goes higher. This happens because the high fixed cost also gets divided among an equally high number of units, thereby reducing it overall negative effect on company profits.