Congratulations, you are the Operations Manager who was selected be a leader in

Question

Congratulations, you are the Operations Manager who was selected be a leader in the company’s largest, new, program. The Program Manager is trying to create a cost structure. You were asked to investigate whether you company should produce the product in-house or purchase it from one of your vendors. Part of your research requires you to formulate a break-even analysis. You need to discuss the break-even analysis philosophy and identify four company related elements that might be considered as part of the break-even formulation process.

Explanation / Answer

Break even in most simple terms is when Revenue generated covers all costs ( Total Fixed costs and Total Variable costs).At this level or Break event point the firm makes no loss and no profit. Thus it breaks even!
The Break even analysis becomes necessary when embarking on a project which may have gestation period, as to when it will start giving returns or profits and also finding out the level it is performing in the course of business for intervention if any by the Management .This is also calculated in terms of percentage of capacity utilization, Number of units to be produced/sales to reach the break even level ( and beyond that level it will be profits) or even Revenue generation in terms of currency be it US Dollar or Indian Rupee or whatever currency in which the firm's operating environment is.

Let's assume you were going to sell that XYZ on ABC online company and they would take a 30% commission for every product sold. The commission is a variable cost because you only have to pay it when you make a sale.

Here's how the break-even analysis could look for that business.
-Fixed Cost (XYZ product) - $500
-Average Price - $5
-Variable Costs (30% Commission) - $1.5

Formula: Break-Even Point = Fixed Costs/(Average Price — Variable Costs)
Step 1: break-even point = 500/(5 —1.5)
Step 2: break-even point = 500/3.5 3.5 is your contribution margin
Step 3: break-even point = 143

In this scenario, you would need to sell 143 copies of your product XYZ in order to make back the money you spent on producer or manufacturer. After you sell 143 costs, the $3.5 per product sold is profit.

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