Break even analysis is a method that has been applied by many business operations in determining the least operational points which they can operate and still remain in business. It is very important for a business that has just entered the market and wants to win its market share before it can set the selling prices for its prices. It is also applicable in events where here are a number of competitors a firm wants to win. Break even point is defined as the point below which a business cannot operate. At this point, the business should be able to cover all its costs, which are fixed and variable costs. It is measured in either product units or dollars.
Bill French, Accountant
The break even analysis is a very important tool to help any firm in deciding on the best operational volume. It requires three types of costs namely the fixed cost, variable cost and selling price (Dayananda, et al, 2002). As Bill French puts it, “the level of operation at which total costs that is, variable plus non-variable are just covered is the break even volume” and it is the least volume that an organization should operate in order to remain in business (Harvard Business School, 1987). There are several assumptions that are made in order to calculate the break even figures since with all the factors considered, it is very hard to compute the figures. In determining the break even figures for the firm, French makes some implicit assumptions. Most of these assumptions are evident in the conversation he is having with the participants at the meeting. In his calculations, Mr. French does not give room for the excepted sales volume increase which according to Cooper, one of the participants from the production department, will increase sales by 20%. He further assumes that the plant capacity is only at 90% utilization implying that it is not fully utilized. However, we learn from Williams (who is from the manufacturing department) that the plant capacity may be at...
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