When expenses and revenues are equal, this is known as the â€œbreak-even pointâ€ or BEP. To determine break-even, an examination of fixed and variable costs (expenses) in relationship to revenues is necessary. Understanding where the BEP is for a given product or service helps managers determine how to make modifications to increase profitability.
For this Assignment, review this weekâ€™s Media, the Weekly Briefing, and the information in the scenario posted in the entry titled Week 6 Assignment located in the Doc Sharing link.
- Part 1: Calculate the break-even point for the toy company under each of the two different scenarios using a spreadsheet program such as Excel. Be sure to apply the appropriate accounting process to determine the break-even points.
- Part 2: Recommend which option, based on the scenarios for the company, that you would select using a word processing program such as Word. Support your conclusion with both a written analysis and quantitative data.
Rory Martin is planning to make a unique toy that promises to keep small children entertained for hours. Rory believes that parents everywhere will want to buy this toy. With a selling price of $30, Rory now needs to determine the costs and the required number of toys needed to be sold before earning a profit, the break-even point.
After researching the costs to produce the toy, the following two locations with associated costs have been determined:
- The rent for the small facility will be $3,000 per month, insurance $600 per month, and other fixed costs are estimated at $1,500 per month. This facility has a capacity to produce 200 toys per month at a variable cost for each toy of $5.00.
- The rent for a larger facility will be $5,500 per month, insurance $800 per month, and other fixed costs are estimated at $2,000 per month. This facility has a capacity to produce 400 toys per month at a variable cost for each toy of $5.00.