1. Break-even analysis To be profitable, a firm must recover its costs. These costs include both…

1. Break-even analysis
To be profitable, a firm must recover its costs. These costs
include both its fixed and its variable costs. One way that a firm
evaluates at what stage it would recover the invested costs is to
calculate how many units or how much in dollar sales is necessary
for the firm to earn a profit.
Consider the case of Free Spirit Industries Inc.:
Free Spirit Industries Inc. is considering a project that will
have fixed costs of $10,000,000. The product will be sold for
$32.50 per unit, and will incur a variable cost of $11.25 per
unit.
Given Free Spirit’s cost structure, it will have to sell
(470,588 /299,712 / 346,154 / 92,219) units to break even on this
project (QBEQBE).
Free Spirit Industries Inc.’s marketing sales director doesn’t
think that the market for the firm’s goods is big enough to sell
enough units to make the company’s target operating profit of
$15,000,000. In fact, she believes that the firm will be able to
sell only about 175,000 units. However, she also thinks the demand
for Free Spirit Industries Inc.’s product is relatively inelastic,
so the firm can increase the sale price. Assuming that the firm can
sell 175,000 units, what price must it set to meet the CFO’s EBIT
goal of $15,000,000?
$154.11 per unit
$161.82 per unit
$177.23 per unit
$192.64 per unit
What affects the firm’s operating break-even point?
Several factors affect a firm’s operating break-even point.
Based on the scenarios described in the following table, indicate
whether these factors would increase, decrease, or leave unchanged
a firm’s break-even quantity—assuming that only the listed factor
changes and all other relevant factors remain constant.

Increase

Decrease

No Change

The firm’s tax rate increases.

The firm depreciates its fixed assets more quickly over a
shorter life.

The variable cost per unit decreases.

When a large percentage of a firm’s costs are fixed, the firm is
said to have a (Low/High)  degree of operating
leverage.