DQ2 Topic 2

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Grand Canyon University *

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Economics

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Feb 20, 2024

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In its pricing and production projection and decision process, every company puts effort into finding a profit at the bottom line, which involves making an extent decision. Fixed costs are irrelevant to extend decisions (Froeb, 2018); however, combined with relevant costs, they become the core to determining the pricing of a product or service and the extent of how much we want to produce or at what scale will be determined by installed capacity and other factors such as demand. For break-even analysis purposes, these numbers are helpful once these parameters are defined, i.e., once price and production are determined, break-even analysis becomes helpful to make further projections and to know if the capital invested today and its future cash flows will produce profits. Using NPV, you can theoretically determine if the projections based on the current break-even point and other metrics will have better visibility into different pricing and sales scenarios and their economic impact (Gallo, 2014). Having the right price can have better profits than increasing sales volume when marginal profit equals marginal cost. In short, the break-even analysis is practical as long as the price and production are established since no company wants to operate based only on a break-even point. Still, it wants to use this parameter to make sustained growth projections. Regarding investment decisions, it is essential to recognize that the break-even point provides a general or theoretical idea that helps to visualize scenarios. When analyzing possible investments, it is better to aim at what we want and build the numbers on those figures, not only on the break-even point. References: Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for managerial economics: A problem solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580 Gallo, A. (2014, July 2). A quick guide to breakeven analysis. Harvard Business Review. https://hbr.org/2014/07/a-quick-guide-to-breakeven-analysis

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