Suppose our kite maker is worried about current demand for kites and has concerns about her firm’s marketing capabilities, calling into question her ability to sell 1,020 units at a price of $75. Now, using the interactive illustration, you can construct a number of informative “what if” scenarios. ![]() And if she sells more than 1,020 units, she will turn a profit. If she sells fewer than 1,020 units, she will lose money. In other words, if this kite maker sells 1,020 units of this particular kite over the lifetime of the operation, she will fully recover the $25,500 in fixed costs she invested in production and selling. You can see on the right-hand side that the Breakeven Volume is 1,020 units. Note: It may be easier to fine-tune precise input values in the interactive illustration using the arrow keys on your keyboard. Put the Revenue per Unit Sold slider ( r) at $75, Variable Cost per Unit Sold ( v) slider at $50, the Fixed Costs ( C) slider at $25,500 and set the actual output at 0. Using the interactive illustration below, you can enter each figure and see the output on the right. Given the $25 unit margin she’ll receive for each kite sold, she will cover her $25,500 in total fixed costs if she sells: If she sells the kite for $75, she’ll make a unit margin of $25. Therefore, the unit variable costs to make a single kite is: $50 ($20 in materials and $30 in labor). The variable costs include the materials used to make each kite - special string for $3, the fabric for the body for $6, wooden dowels for $7, a special plastic handle for $4 - and the labor required to assemble the kite, which amounted to one and a half hours for a worker earning $20 per hour. These costs are fixed because they will not change with the number of kites sold. These costs might cover the software needed to design the kite and be sure it is sufficiently aerodynamic, the fee paid to a graphic designer to design the look and feel of the kite, and the development of promotional materials used to advertise the kite. Assume she must incur a fixed cost of $25,500 to produce and sell a kite. To show how this works, let’s take the hypothetical example of a high-end kite maker. You’re typically solving for the Break-Even Volume (BEV). It’s a simple calculation to determine how many units must be sold at a given price to cover one’s fixed costs. Setting a price is, of course, complicated but breakeven analysis can help. ![]() Having the right price for a product or service can boost profit much faster than increasing volume. Managers typically use breakeven analysis to set a price to understand the economic impact of various price- and sales-volume scenario. ![]() Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math - and because understanding the formula can only deepen your understanding of the concept - here’s a closer look at how the concept works in reality. In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted.
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