Princaples of Marketing MKT 100

The breakeven point is derived from a breakeven analysis . This consists of an application of marginal costing , under which the relationship of costs , volume produced /sold and profits are examined at different levels of activity . The break-even point is the area at which the firm is neither making a profit nor a loss from the product . By knowing this point , we can analyze the viability of the price charged . So by identifying this point we can notice several important features that help us in price determination

Let us further illustrate this point

with the aid of an example . The management accountant of a company was able to determine the following relevant costs and sales volume at different economic conditions . These are depicted below

Variable Costs 6 per unit

Fixed Costs 50 ,000

Expected Units Sold : Economic boom 30 ,000 units , economic recession 23 ,000 units

The management of the company is considering the selling prices 10 per unit and 8 per unit . The break-even point under these two selling prices would amount to As we can see from this example , the break-even point provides important information . For instance in this case , the firm should charge a selling price of 10 per unit , because it they set the other price and the economic cycle of the country is passing from a recession , they will incur a loss , because the units sold of 23 ,000 are lower than the breakeven point amounting to 25 ,000 units . The 10 per unit price is also more viable because the margin of safety under both economic conditions is higher

Reference

Lucey T (2003 . Management Accounting . Fifth Edition . Great Britain Biddles Ltd

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BREAKEVEN POINT...