Principles of Managerial Finance

FIN/419

P12.4 Break even analysis.

Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for each, variable operating costs are per CD, and annual fixed operating costs are 73,500.

A) Find the operating breakeven point in number of CDs.

Q FC / P- VC

Q 73,500 / -

Q 21,000 CDs

B) Calculate the total operating costs at the breakeven volume found in part a.

EBIT Q x (P - VC) - FC

EBIT 21,000 x ( - ) - 73,500

EBIT 21,000 x 3.5 - 73,500

EBIT 0

C) If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business?

2,000 CDs per month x 12 months 24,000 CDs. Since the operating...