Why is it important for a business to know their break–even point?
Could you also provide an example? I am trying to understand this better for accounting class13 months ago - 2 answers
Well they have to know for the selling of product. If they are selling less product then the cost they won't make money.
Fixed Cost (FC) = $2 million
Variable Cost (VC) = $1/unit
Unit Selling price = $2
Expected sales = 1 million
So $1 million profit on the unit, but then the FC are factored in and they actually lost $1 million.
FC = $5 million
VC = $8/unit
Unit Selling Price = $10
Expected Sales = 10 million
So in this scenario, despite the fact the selling price is only 20% higher then the VC, they sales are much higher and the company can expect to make $15 million because of the high sales covering the FC.
This is a really really simplified example but I hope it helped.
so you know when you start making a profit?by nick - 13 months ago