Calculating break even point Watch

1. Could someone help me calculate the break even point,

Say the fixed cost =100
Selling price =5
total Variable cost=100
Predicted Sales =50 units
Capacity to produce = 100 units

I apply the formula, Fixed Cost/(selling price - variable cost per unit)

But I am confused whether to divide the variable cost by 50 as this is the predicted sales or do I divide it by the capacity to produce of 100? Thank you!
2. I'd go with the capacity rather than predicted sales, but I may be wrong ...

Variable cost per unit: 100 units / £100 = £1

Therefore: 100/(5 - 1) = 25

25 units need to be sold to break even.

If you went with predicted sales the break-even point would be 33.33 ... and these calculations usually culminate in a round figure.

Also predicted sales are just a prediction. A company that only produced enough to meet predicted sales would run the risk of failing to meet demand. The exception to this is JIT production where the process is so streamlined that products are created only when they are ordered to save on stock holding costs.

I think that's the answer ... sorry it's long-winded! :-)
3. (Original post by Mr Student)
I'd go with the capacity rather than predicted sales, but I may be wrong ...

Variable cost per unit: 100 units / £100 = £1

Therefore: 100/(5 - 1) = 25

25 units need to be sold to break even.

If you went with predicted sales the break-even point would be 33.33 ... and these calculations usually culminate in a round figure.

Also predicted sales are just a prediction. A company that only produced enough to meet predicted sales would run the risk of failing to meet demand. The exception to this is JIT production where the process is so streamlined that products are created only when they are ordered to save on stock holding costs.

I think that's the answer ... sorry it's long-winded! :-)
Ok thats thats what I thought as well do other people agree or disagree?

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Updated: December 2, 2010
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