Imagine that you want to launch a new business selling a smartphone app. You make the following assumptions about your costs and revenue. The expected average selling price = $7. Estimated fixed costs = $75,000 (this is enough to cover your salary and pay for a small office). These costs will not change with the number of apps sold. Variable costs = $0.50 (these are the transaction fees you need to pay on each sale). (1) Armed with this information, calculate the break-even point in units: (2) To earn a profit of 5%, how many units do you need to sell? (3) What if you were able to reduce the estimated fixed cost to $65,000, what would your new break-even be in units? (4) What if you missed the mark on variable costs and the actual variable costs are $1.15, what would your break-even be in units?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Break-even Analysis Example
Imagine that you want to launch a new business selling a smartphone app. You make the following assumptions about your costs and revenue.
- The expected average selling price = $7.
- Estimated fixed costs = $75,000 (this is enough to cover your salary and pay for a small office). These costs will not change with the number of apps sold.
- Variable costs = $0.50 (these are the transaction fees you need to pay on each sale).
(1) Armed with this information, calculate the break-even point in units:
(2) To earn a profit of 5%, how many units do you need to sell?
(3) What if you were able to reduce the estimated fixed cost to $65,000, what would your new break-even be in units?
(4) What if you missed the mark on variable costs and the actual variable costs are $1.15, what would your break-even be in units?
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