3 to these data yields q 2500 10 5 2500 5 500 units at

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Unformatted text preview: g Equation 11.3 to these data yields Q $2,500 $10 $5 $2,500 $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 units, along with the other values given, into Equation 11.1. The Graphical Approach Figure 11.1 presents in graphical form the breakeven analysis of the data in the preceding example. The firm’s operating breakeven point is the point at which its total operating cost—the sum of its fixed and variable operating costs—equals sales revenue. At this point, EBIT equals $0. The figure shows that for sales below 500 units, total operating cost exceeds sales revenue, and EBIT is less than $0 (a loss). For sales above the breakeven point of 500 units, sales revenue exceeds total operating cost, and EBIT is greater than $0. Changing Costs and the Operating Breakeven Point A firm’s operating breakeven point is sensitive to a number of variables: fixed operating cost (FC), the sale price per unit (P), and the variable operat...
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