the superior recording company sells album for birr 5 each. manufacturing cost is birr 1.30 per album ,marketing cost is birr 1.20 per album and loyalty payment are 20% of selling price. the fixed cost of preparing the album is 9000. capacity is album is 15,000 draw break even chart
To draw the break-even chart, we need to calculate the break-even point first. The break-even point is the quantity of albums that need to be sold in order to cover all costs and neither make a profit nor incur a loss.
1. Calculate the variable cost per album:
Variable cost per album = Manufacturing cost + Marketing cost
= Birr 1.30 + Birr 1.20
= Birr 2.50
2. Calculate the contribution margin per album:
Contribution margin per album = Selling price - Variable cost per album
= Birr 5 - Birr 2.50
= Birr 2.50
3. Calculate the fixed cost:
Fixed cost = Birr 9,000
4. Calculate the contribution margin ratio:
Contribution margin ratio = Contribution margin per album / Selling price
= Birr 2.50 / Birr 5
= 0.5 = 50%
5. Calculate the break-even point in units:
Break-even point (in units) = Fixed cost / Contribution margin per album
= Birr 9,000 / Birr 2.50
= 3,600 units
6. Draw the break-even chart indicating the break-even point:
Assume the horizontal axis represents the quantity of albums sold and the vertical axis represents the total cost and revenue.
- Plot the total revenue line:
Start at the origin (0,0) and draw a straight line with a positive slope representing the total revenue. The slope is equal to the selling price.
- Plot the total fixed cost line:
Start at the point (0, fixed cost) and draw a horizontal line representing the total fixed cost.
- Plot the total variable cost line:
Start at the point (0,0) and draw a straight line with a positive slope representing the variable cost per album. The slope is equal to the variable cost per album.
- Draw the break-even point:
Draw a vertical line from the break-even point (3,600 units) until it intersects with the total cost line.
- Label the axes, break-even point, and lines accordingly.
Please note that the break-even chart is a visual representation of the break-even point and provides insight into the relationship between costs, revenue, and profit.
To create a break-even chart, we need to calculate the total costs and the total revenue at various levels of album sales. The break-even point occurs when the total revenue equals the total costs, indicating that neither profit nor loss is incurred.
Let's calculate the costs and revenue for different levels of album sales:
1. Manufacturing Cost per Album: birr 1.30
2. Marketing Cost per Album: birr 1.20
3. Loyalty Payment: 20% of Selling Price (birr 5 x 20% = birr 1)
Total Cost per Album:
Manufacturing Cost + Marketing Cost + Loyalty Payment
= 1.30 + 1.20 + 1
= birr 3.50
Fixed Cost of Preparing the Album: birr 9000
Now, let's calculate the total costs and revenue for different levels of sales:
1. For 0 album sales:
Total Cost = Fixed Cost = birr 9000
Total Revenue = Selling Price x Number of Albums Sold
= birr 5 x 0
= birr 0
2. For 5000 album sales:
Total Cost = Total Cost per Album x Number of Albums Sold + Fixed Cost
= 3.50 x 5000 + 9000
= birr 17,500 + birr 9000
= birr 26,500
Total Revenue = Selling Price x Number of Albums Sold
= birr 5 x 5000
= birr 25,000
3. For 10000 album sales:
Total Cost = Total Cost per Album x Number of Albums Sold + Fixed Cost
= 3.50 x 10000 + 9000
= birr 35,000 + birr 9000
= birr 44,000
Total Revenue = Selling Price x Number of Albums Sold
= birr 5 x 10000
= birr 50,000
4. For 15000 album sales:
Total Cost = Total Cost per Album x Number of Albums Sold + Fixed Cost
= 3.50 x 15000 + 9000
= birr 52,500 + birr 9000
= birr 61,500
Total Revenue = Selling Price x Number of Albums Sold
= birr 5 x 15000
= birr 75,000
Now, let's create the break-even chart:
Number of Albums Sold | Total Costs | Total Revenue
---------------------------------------------------------------
0 | birr 9000 | birr 0
5000 | birr 26,500 | birr 25,000
10000 | birr 44,000 | birr 50,000
15000 | birr 61,500 | birr 75,000
Now, plot these points on a graph, with the number of albums sold on the x-axis and the total costs/revenue on the y-axis. Draw a straight line connecting these points. The point at which the line intersects the x-axis is the break-even point.