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Respond to two or more of your colleagues’ posts in one or more of the following ways. (Respond to each Colleague 150 words or more)
Provide an insight you gained from reading your colleague’s example of how understanding the break-even point would help with decision making.
Offer additional ideas for what elements your colleague could change to improve the break-even point.
Return to this Discussion in a few days to read the responses to your initial posting. Note what you have learned or any insights you have gained as a result of the comments your colleagues made.
1st Colleague to respond to:
Describe an example from your professional or personal life in which you might use break-even analysis to support a decision.
I will use the example of our recent band members/parent T-shirt sales. Each child is required to purchase a band show shirt. The show shirt displays the current half-time theme show, the football schedule, and the band competition dates. The band orders extras for parents and family members to purchase. We try to get a close estimate of the number of shirts that we will actually sell. Each year the quantity changes based on the number of students in band. This year the number of band students is 125. Therefore, we know that we will definitely need 125 shirts to start the order. Each shirt costs the band $9 and we sell them to the students for $10. The $10 covers the price of printing the shirts and the shipping cost. When the final price is determined the band makes $1 profit per shirt.
This year we ordered 200 shirts. The total cost of the order when completed and shipped was $1800. We are guaranteed $1250. The amount needed to break even is $550. Our goal is to sell all the shirts at $10 which would be a total sale of $2000. However, each year we have a few shirts left over that we sell at discounted prices after football season. Therefore, we have calculated that the least amount we could sell the parent/family shirts for is $7.34 to break-even.
Analyze why and how understanding the break-even point would help in making an effective decision.
Managers usually use the breakeven analysis to set a price to understand the economic impact of various price – and sales-volume scenarios. Pricing matters. Having the right price for a product or service can boost profit much faster than increasing volume. Setting a price is, of course, complicated but breakeven analysis can help (Gallo, A. 2014).
The breakeven point is when the sales revenue is exactly equal to the total expenses and there is no profit or loss. Accounting measures can provide quantifiable data, but they should only be a part of the decision-making process. Good management decisions will include quantitative as well as qualitative information (Davis & Davis, 2017).
If we do not fully understand the break-even analysis, we will more than likely will not choose the correct amount to sell our product for in order to break-even.
In considering you example, identify what elements you might consider to improve the break-even point.
I think that the best situation that the band should use in order to break-even is to presale the show shirts. If they did this they would know exactly what to order and know the exact amount of money to charge if they chose to use the break-even analysis system.
References:
Davis, C.E., & Davis, E. (2017). Managerial accounting (3rd ed.). Wiley.
Gallo, A. (2014, July 2). A quick guide to breakeven analysis. Harvard Business Review Digital Articles, 2-5. http://hbr.org
2nd Colleague to respond to:
Break-even point refers to when total costs and total revenue are equal. This means there has been no loss or gain to the business. It is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. The break-even price is the amount of money to charge for a product or service to cover the costs of manufacturing that product or providing that service. The breakeven formula is calculated by dividing the fixed costs associated with production by the revenue per individual unit minus the variable costs per unit (Mitchell2022). In simpler terms, break even refers to the production or service you provide revenues are equal to the total expenses to make that product or provide that service.
In my personal life, one example of break-even point is trading my car. I currently drive a Nissan Rogue. I have recently been considering trading in my car for something newer and more suitable for my small business. I run my own residential cleaning service on the weekends outside of my fulltime weekday job. I often service 2-3 clients each day on both Saturday and Sundays and my car is becoming less suitable to haul all of my cleaning supplies to different areas of Atlanta from one customer to the next.
There are many aspects that can affect the value of your car such as condition of the car or your loan status. The break-even point is one of the best times to trade in your car in order to maximize your value and get the most from your trade in. I currently still owe on my car and the type of SUV model that I am looking into is offering me a trade-in value for my car that matches what I currently owe on my current car allowing me to break even. The break-even point on a vehicle is when you are holding a loan and the trade in value either matches or is larger that the amount you owe. This means you are in the most cost-effective period for your current vehicle and it is a good time to trade and start a new contract on a newer car to your liking. For example, I am currently in a 72-month term and my break-even point for my car right now is at 48 months. I have not decided on trading my car yet, but if I do I know the right time is now.
By understanding the break-even point on my trade, it has helped me to make more effective decisions by doing the necessary research before jumping into a newer car through a trade-in and not considering the best value for my trade based on what the dealership is offering to give me as well as what the most affordable and reliable car that I can still afford if I upgrade. As the time passes, your car loses value. You cannot sell your vehicle above the trade price or you will have to pay the rest of that loan out of pocket. Being more aware of your break even point in any business will help you determine the amount of sales you will need to break even without experiencing a financial loss and help to make future realistic goals in order for your business to gain a profit. Your business incoming revenue will become a profit as long as the expenses and costs are not increased and the sales amount are not reduced. Your break-even point is directly related to your fixed costs therefore reducing and controlling your fixed costs will help your business in achieving a lower break even point for faster profitability.
There are many ways you can improve on your break-even point when considering a trade in. You can pay a bigger deposit upfront, make more than the monthly payments, financing over shorter loan periods and never miss a payment otherwise it will push your break-even point back. The best time to trade in your vehicle is when the trade value is in line with the settlement amount owed to the bank its financed with. Buyer should also never start a finance agreement with a zero deposit as it will set your break even as far back as the loan period as possible and any missed payments will push your breakeven further back more (Gaoaketse 2022).
References
Franklin M Graybeal P & Cooper D (2019) 3.2 calculate a break-even point in units and dollars. In Principals of accounting volume 2. Managerial accounting. OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/3-2-calculate-break-even-point-in-units-and dollars.
Gaoaketse, L. (2022, April 29). Trading In? We Need To Talk About A Break Even Point.
Mitchell, C. (2022, March 2). Break-Even Point: Definition, Examples and How to Calculate. Investopedia.
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