Name Date. Break-Even Analysis

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1 Name Date Break-Even Analsis In our business planning so far, have ou ever asked the questions: How much do I have to sell to reach m gross profit goal? What price should I charge to cover m costs and allow for a planned amount of gross profit? How much does m gross profit change if I increase m sales b 10%? These are some of the questions that ou can easil answer b doing a simple break-even analsis: 1. Break-even analsis: Mathematical analsis used to determine the sales level (units sold and revenue) at which the business neither incurs a loss nor makes a profit. 2. Break even-point: Occurs when the gross profit (or net income/loss) is equal to zero (Gross Profit = 0). Sample Break-Even Graph: Break-Even Analsis - Gross Profit Thousands of Dollars Thousands of Units Fied Costs Costs of Goods Sold Revenue Break-Even Point Equation: COGS = Revenue Or (Variable Costs/Unit)(Units) + Fied Costs = (Price/Unit) (Units)

2 TO DO: 1. Use the tables below to graph our revenue, cost of goods sold, and fied costs. Include all three lines in one Ecel graph titled Break-even Analsis Gross Profit. Revenue: -ais: Cost of Goods Sold: -ais: Fied Costs: -ais: constant equation: 2. What is our break-even point? Revenue = Cost of Goods Sold =

3 Gross Profit = Units = 3. Calculate the number of units our compan would need to sell to have the following gross profit margins (show our work for our first 2 calculations): Gross Profit Margin - A measurement of profitabilit; percentage of revenue that is applied to gross profit. Gross Profit Margin = Gross Profit 100% Revenue Gross Profit Margin (%) Gross Profit ($) Revenue ($) Units 4. Circle the row in the table above that corresponds to the number of units ou hope to sell in the first ear of our business. a. Does the structure of our compan support ou reaching this goal? Wh or wh not? b. Is our business capable of producing our desired number of units? Think about the number of hours it would require people to work in a ear and remember that the onl work approimatel 246 das/ear. 5. Now that ou have run our first break-even analsis, it is time to look for was to increase our profit margin. For eample, ou ma be able increase our profit

4 margin and still sell the same number of units to b lowering our COGS or increasing our revenue. Choose three adjustments that ou can make to our business plan and repeat steps 1-4 of the break-even analsis. A) ADJUSTMENT #1: 1. Use the tables below to graph our revenue, cost of goods sold and fied costs. Revenue: -ais: Cost of Goods Sold: -ais: Fied Costs: -ais: constant equation:

5 2. What is our break-even point? Revenue = Cost of Goods Sold = Gross Profit = Units = 3. Calculate the number of units our compan would need to sell to have the following gross profit margins: Gross Profit Margin (%) Gross Profit ($) Revenue ($) Units 4. Circle the row in the table above that corresponds to the number of units ou hope to sell in the first ear of our business. a) Does the structure of our compan support ou reaching this goal? Wh or wh not? b) Is our business capable of producing our desired number of units? B) ADJUSTMENT #2: 1. Use the tables below to graph our revenue, cost of goods sold and fied costs. Revenue: -ais:

6 Cost of Goods Sold: -ais: Fied Costs: -ais: constant equation: 2. What is our break-even point? Revenue = Cost of Goods Sold = Gross Profit = Units = 3. Calculate the number of units our compan would need to sell to have the following gross profit margins: Gross Profit Margin (%) Gross Profit ($) Revenue ($) Units

7 Circle the row in the table above that corresponds to the number of units ou hope to sell in the first ear of our business. a) Does the structure of our compan support ou reaching this goal? Wh or wh not? b) Is our business capable of producing our desired number of units? (HINT: Look at direct materials and direct labor in our COGS tables!) C) ADJUSTMENT #3: 1. Use the tables below to graph our revenue, cost of goods sold and fied costs. Include all three lines in one Ecel graph titled Break-even Analsis Gross Profit. Revenue: -ais: Cost of Goods Sold: -ais:

8 Fied Costs: -ais: constant equation: 2. What is our break-even point? Revenue = Cost of Goods Sold = Gross Profit = Units = 3. Calculate the number of units our compan would need to sell to have the following gross profit margins: Gross Profit Margin (%) Gross Profit ($) Revenue ($) Units

9 4. Circle the row in the table above that corresponds to the number of units ou hope to sell in the first ear of our business. a) Does the structure of our compan support ou reaching this goal? Wh or wh not? b) Is our business capable of producing our desired number of units? (HINT: Look at direct materials and direct labor in our COGS tables!) 5. Review the adjustments that ou made to our business plan. How did the break-even-analsis change the wa ou plan to set up our business?

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