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Break-Even Analysis and Impact on Profitability

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1. Research the economic costs involved in conducting a break-even analysis for a good or service of your choice. Assess the factors involved in conducting a break-even analysis. Determine the conditions that may exist for a manager of this good or service may decide to move forward with operations even with the initial costs of operations is more than the potential revenue.
2. Imagine you are a manager of a chemical company. An accident has occurred in which chemicals leaked into the ground water nearby; the community is unaware. Assess the costs involved in cleaning up the water immediately (confessing) versus hiding the fact and possibly paying more in the future. Discuss the impact on profitability in both situations.

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1. To conduct a break-even analysis you need the fixed costs and the variable costs. In addition, you need the price of the product. Say you make and sell a coffee making machine. The price is $500, the variable cost is $250, and the total fixed cost is $12,500. The contribution to the fixed cost is $500 less $250 equals $250. When we divide $12,500 with $250 we get 50 coffee making machines. The breakeven point is 50 coffee making machines.
The conditions under which a manager may make coffee making machines even if the initial costs of operations is more than the potential revenue is when the ...

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See Also This Related BrainMass Solution

MediaSol Inc. Cost Volume Profit , break even, effect on operating profit

Please complete questions in attachment.

MediaSol Inc. Produces affordable, high quality personal mulitmedia entertainment devices. The company's Video Division manufactures three portable video players - the Stnadard, the Deluxe, and the Pro-that are widely used by the younger generation. Selected information on the portable video players is given below:

Standard Deluxe Pro
Selling price per video player $80 $120 $180
Variable expenses per video player:
Production 44 54 63
Selling (10% of selling price) 8 12 18

All sales are made through the company's own retail outlets. The Video Division has the following fixed costs:

Per Month
Fixed production costs $90,000
Advertising expense 75,000
Administrative salaries 37,500
Total $202,500

Sales, in unites, over the past two months have been as follows:

Standard Deluxe Pro Total
April 1,000 500 2,500 4,000
May 3,750 750 1,500 6,000

Required:
1. Using the contribution approach, prepare an income statement for April and an income statement for May,
2. with the following headings:

Standard Deluxe Pro Total
Amount % Amount % Amount % Amount %
Sales
Etc....

Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.

2. On seeing the income statements in (1) above, the president stated, "I can't believe this!
We sold 50% more portable video players in May than in April, yet profits went down. It's obvious that costs are
out of control in that division." What other explanation can you give for the drop in operating income?

3. Compute the Video Division's break-even point in dollar sales for April.

4. Has May's break-even point in dollar sales gone up or down from April's break-even point? Explain without
computing a break-even point for May.

5. Assume that sales of the standard video play increase by $35,000. What would be the effect on operating
income? What would be the effect if Pro video player sales increased by $35,000? Do not prepare income
statements; use the incremental analysis approach in determining your answer.

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