The breakeven analysis of a business is performed to evaluate the minimum number of units a company must sell to break even in terms of profit and loss. The breakeven point of a company can be calculated by dividing the total fixed cost of the company by the contribution margin. Contribution margin is the difference between sales price per unit and variable cost per unit of the company’s products (Brigham & Ehrhardt, 2001).
Break-even point = Total Fixed Cost / Selling Price per Unit – Variable Cost per Unit
The total fixed cost of the franchise are the operating expenses which will be incurred irrespective of the number of units sold excluding royalty expense which is tied to the amount of total revenue. The selling price per unit for the franchise is $4 and the variable cost per unit is $1.2 which has been derived from the cost of goods sold and royalty expenses. The breakeven point for the franchise can be calculated by implementing the mathematical formula.
Break-even point = 102,130 / (4 – 1.2)
Break-even point = 102,130 / 2.8
Break-even point = 36,475 units
The breakeven point of the franchise where the company would be earning no profit and no loss is 36,475 units. This is the minimum number of units the company must sell each year to avoid losses and any number of units sold above this level would be a profit to the firm.
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