For convenience and clarity we assume that all costs

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Unformatted text preview: sales and then increase to higher levels for higher volumes. For convenience and clarity, we assume that all costs can be classified as either fixed or variable. 510 PART 4 Long-Term Financial Decisions As noted above, the operating breakeven point is the level of sales at which all fixed and variable operating costs are covered—the level at which EBIT equals $0. Setting EBIT equal to $0 and solving Equation 12.2 for Q yield Q P FC VC (12.3) Q is the firm’s operating breakeven point.3 EXAMPLE Assume that Cheryl’s Posters, a small poster retailer, has fixed operating costs of $2,500, its sale price per unit (poster) is $10, and its variable operating cost per unit is $5. Applying Equation 12.3 to these data yields Q $2,500 $5 $2,500 $10 $5 500 units At sales of 500 units, the firm’s EBIT should just equal $0. The firm will have positive EBIT for sales greater than 500 units and negative EBIT, or a loss, for sales less than 500 units. We can confirm this by substituting values above and below 500...
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