Application: Break-Even Analysis

When expenses and revenues are equal, this is known as the "break-even point" 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 week's Media, the Weekly Briefing, and the information given below.

LaTricia Jones is planning to make a unique toy that will keep small children entertained for hours! She believes that parents everywhere will want to buy her toy, and she needs to determine her costs and the number of toys she needs to sell before earning a profit.

After researching her costs, she has come to the following conclusions.

The rental of a small facility will be $2,200 per month, insurance $500 per month, and other fixed costs are estimated at $1,300 per month. In this facility, she will be able to produce 100 toys per month at a variable cost for each toy of $5.00. She plans to sell them for $30 each.

The rent for a larger facility will be $5,000 per month, insurance $1,000 per month, and other fixed costs are estimated at $2,580 per month. In this facility, she will be able to produce 400 toys per month at a variable cost for each toy of $4.00. She plans to also sell them for $30 each.

The Assignment:

Part 1: Calculate the break-even point for LaTricia Jones' 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.