Running Head: Break even analysis.

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 Breakeven analysis
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The breakeven point of a product is the point at which the business is able to cover its

expenses with nil profit. This is the point at which any additional revenue is calculated as a profit

to the business. Breakeven analysis is an important measure in business since it measure the

point of profitability. Any value above the break-even point is a profit and any amount below this

point is assumed to be a loss to the business. It is important to include that the break even

analysis in pricing decisions especially for new businesses like Angelos.

A breakeven analysis for individual units is calculated and to determine the profitability

of individual products. This will be used to show which products are profitable and which are

loss making. The products that fail to cover their production expenses are loss making and

appropriate action must be taken.

In this case we evaluate the break even analysis for Alaska coffee which sells coffee espresso

scones and bear claws. For each product the computation of break-even units need to be

calculated individually to show the viability of each product since it is a new business. From the

Angelos tabulation we note that the business has the following fixed costs that he has to account

for

a) $1200/month for employees, totaled up, and

b) $1500/month lease, insurance, state, and borough fees.

This fixed costs are part of the costs that will form the total cost of production of the four

coffee variants of the business. The business uses the apportionment method to assign the fixed

costs to the various products that are being sold. The first requirement is the break-even point of

sales per month for each product. Which is derived as:

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Break even analysis is calculated by [Breakeven point = fixed costs/ (unit selling price variable

costs)] or fixed cost\contribution margin (Amy, 2014).

Fixed costs

Selling cost per unit- variable cost per unit

Break even analysis for each of the items is as follows

a) Coffee

Total fixed costs=2700 (1500+1200)

75% of 2700=2025

2025

2-0.25

= 1157 cups

b) Espresso

0.15% of 2700=405

405

3-0.5

=162 cups

c) Scones
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0.05% of 2700=135

135

=67.5 ea

d) Bear claws

0.05% of 2700=135

135

0.5

=270 ea

The next requirement was the total sales figure for the shop be at the break-even

point. At break-even total sales equals break even units multiplied by the selling price per

unit.

Coffee

1157 * 2=2314

Espresso

162*3=486
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Scones

4*67.5=270

Bear claws

270*1.50=405

= Total sales =$ 3475

At $3475 the business is able to meet its expenses well and any additional revenue is

calculated as a profit to the business.

The break even analysis is a good method for Angelo to develop a strategy for his

business to boost its growth over the long term. In the event that an organization's profitability is

dictated by the achievement of at least one or more items, utilizing the breakeven point for every

item will give a course of events to the organization. This can be utilized to actualize an overall

financial strategy that fits the anticipated expenses and benefits (Tsorakidis, 2011).

Angelo could improve his business by lowering his variable cost this would lead to

greater profits and would ultimately reduce the total number of units that needed to be produced

to break even. Reduction of the variable costs improves the contribution margin for each item.

Contribution margin is a cost accounting technique that enables an organization to decide the

productivity of individual items. The contribution margin can likewise refer to a for each unit

measure of an item's gross operating profit figure essentially as the item's value, short its

aggregate variable expenses. This metric will enable the business to be able to evaluate the
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different business products and to determine which product is performing well and which is

poorly performing based on the highest operating profit.

If Angelo reduces the variable costs for the production of the various coffee variants it

will boost increase the contribution margin and reduce the number of units needed to break even.

Some of the products for example for scones and bear claws the variable costs are very high and

this increases the number of units needed to break even. For scones a 50% variable costs to the

selling price is termed too high and should be reduced to a maximum of approximately 25% and

this will increase the contribution margin to approx. 75% which in turn lowers the total number

of units required to break even. For bear claws the variable costs are too high at $1 compared to

the selling price of about $1.50. This reduces the contribution margin to just approx. 33% which

is not a favorable margin.

For the other two products the coffee and espresso the current contribution margins are
okay and hence it may not require that Angelo makes any changes to the current variable costs.
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References

Amy, G. 2014. A Quick Guide to Breakeven Analysis, https://hbr.org/2014/07/a-quick-guide-to-

breakeven-analysis. Retrieved April 30, 2017

Tsorakidis, N., Papadoulos, S., Zerres, M., & Zerres, C. (2011). Break-even analysis. Bookboon.