Business Question

Breakeven analysis is a useful planning tool for a potential small business owner, especially when approaching lenders and investors for funds. It provides an opportunity for an integrated analysis of sales volume, expenses, income, and other relevant factors. Breakeven analysis is a simple, preliminary screening device for an entrepreneur faced with a business start-up decision. It is easy to understand and use. With just a few calculations, an entrepreneur can determine the effects of various financial strategies on the business operation. It is a helpful tool for evaluating the impact of changes in investments and expenditures.

Calculating the breakeven point for a startup business is important because it tells an entrepreneur the minimum volume of sales required to stay in business in the long run.

Anita Dawson is doing some financial planning for her small gift store. According to her budget for the upcoming year, Anita is expecting sales of $495,000. She estimates that the cost of goods sold will be $337,000, and other variable expenses will total $42,750. Using the previous year as a guide, Anita anticipates fixed expenses of $78,100.

Anita recalls a meeting she had recently with her accountant, who mentioned that her store already had passed its breakeven point eight and a half months into the year. She was pleased but really didn’t know how the accountant had come up with that calculation. Now Anita is considering expanding her store into a vacant building next door to her existing location and taking on three new product lines. The company’s cost structure would change, adding another $66,000 to fixed costs and $22,400 to variable expenses. Anita believes the expansion could generate additional sales of $102,000 in the first year.

She wonders what she should do.

1- Calculate Anita’s breakeven point without the expansion plans. Draw a break-even chart.

2- Compute the breakeven point, assuming that Anita decides to expand her business.

3- Do you recommend that Anita expand her business? Explain.