Break-Even Analysis: Warren Soft's Period Pieces
What is the break-even point for Warren Soft, a company that sells period pieces?
Options:
A) 714 pieces
B) 738 pieces
C) 928 pieces
D) 617 pieces
Final answer: To calculate the break-even point, we equate total revenue to total cost. Given the fixed costs, variable cost per unit, and selling price, we solve for the quantity at which this occurs. The break-even point for this firm is approximately a. 714 pieces.
Break-Even Point Calculation:
Warren Soft, a company that makes period pieces, has total fixed costs of $500,000. Each piece is sold at a price of $2,500 and has variable costs of $1,800 per unit. To determine the break-even point, we need to find the quantity at which total revenue equals total cost.
Break-even analysis is a crucial tool for businesses to determine the point at which total revenue equals total cost, resulting in neither profit nor loss. In the case of Warren Soft, the fixed costs are $500,000, the variable cost per unit is $1,800, and the selling price per unit is $2,500.
Let's denote the break-even quantity as 'Q'. To calculate the break-even point, we set total revenue equal to total cost:
Total revenue = Quantity x Selling Price = Q x $2,500
Total cost = Total fixed costs + (Variable cost per unit x Quantity) = $500,000 + ($1,800 x Q)
By setting these two equations equal to each other and solving for Q, we find that the break-even quantity is approximately 714 pieces. This means that Warren Soft needs to sell at least 714 pieces to cover all costs and reach the break-even point.
Break-even analysis is essential for businesses to make informed decisions about pricing, production levels, and overall profitability. By understanding their break-even point, companies like Warren Soft can plan their strategies effectively and work towards achieving financial success.