Concept explainers
To determine: The break-even point of the product
Break-even point is where the firm earns no profit and no gains.
Explanation of Solution
Break even analysis is used to determine the amount the product should be sold at a price to earn the sufficient revenue to cover the fixed and variable costs.
The breakeven point:
Company JD has annual pizza sales of $480,000, fixed costs of $190,000, average price of 2-topping pizza, and large of $11 and variable cost of $4 with profit margin of 75%
Formula to calculate the breakeven point:
Formula to calculate the sales price using margin method:
Hence, the sales price is $16.
This price will cut the sales volume in turn customers of JD Company may be less price sensitive to a quality products.
A cost-volume-profit analysis says that even a small drop in the volume makes the gross profit to increase.
So, company JD considers investing in the area of delivery drivers, online stores, applications and others.
The fetches a fixed cost of additional $100,000. So the new breakeven point will be as below.
The breakeven point will be:
Hence, the breakeven point is $24,167 pizzas.
Though the BEP was below the last year’s volume and below the revised sales projections, Company JD was confident in revising its average price of pizzas to $16.
This will improve the differentiation from Company D by providing various convenient options on ordering and which will lead to increase in profits.
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