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How does this affect the break even point
A production process requires a fixed cost of $50,000 and the variable cost per unit is $25. The revenue per unit was projected to be $45 but a recent marketing study shows that because of an emerging competitor, the revenue will be about 12% lower. How does this affect the break even point?
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The break-even point is the point at which your expenses and income zero out. If the profit margin drops by 12%, then it will take 12% longer to reach the break-even point. At $25 production cost per item and $45 sale price, the profit is $20/item and it will take 2500 items sold to amortize the original $50,000 cost (the per-item cost is deducted per item to give the profit margin). Deduct 12% from the $20 per-item profit, and you per-item profit drops to $17.60. You would have to sell 2841 units to make up the $50,000 investment. Depending on your annual sales rate, you can determine how long it will take to break even.
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