What information needs to be gathered for a break-even analysis?
What will be an ideal response?
To construct a break-even analysis, the following information is gathered: NAICS code, fixed cost, unit cost, the
manufacturer's suggested retail price (MSRP) of the unit, and a sales forecast that shows the projected unit sales
over time.
• Fixed Cost: Fixed costs are costs which stay constant regardless of the number of units made (within limits).
Examples include rent, depreciation, and insurance.
• Unit Cost: Unit cost is the cost to produce each unit, including material and labor as well as any allocated
overhead costs. In equation form, we have: Unit cost = (Variable cost + Fixed cost)/Unit sales. Variable costs are
costs which vary according to the number of units made, such as parts and materials per unit, as well as direct
production labor per unit.
• Price: A company might conduct market research to determine typical competitive pricing for products similar to
its own, as well as poll representatives of its target market for indications for what they would expect to pay for
such a unit.
• Sales Forecast: A sales forecast gives the company the expected number of units to be sold per year for a fixed
period of time. A forecast is arrived at by examining the actual sales history of similar units sold in the past,
adjusting those numbers to reflect current situations.
• Break-even Volume Calculation: The break-even volume (number of units) is calculated according to the
following formula:
Break-even Volume = (Fixed Cost)/(Price - Unit Cost)
• Break-even Time Calculation: In order to get the expected time for break-even, the sales forecast is superimposed
on a typical S-shaped sales plot. The sales plot shows the familiar product life cycle: introduction, growth, maturity,
and decline. The plot also shows the break-even point.
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