2-68:-Solution

Ahtisham Maan is starting a store of spare parts of a car in a Rawalpindi, selling engine of Honda
company. Before he signs a lease, he wants to know how much his net sales must be to cover her
rent. He's smart to be thinking this way; too many new business owners just jump right in and get
started without knowing whether the business is likely to succeed, or fail. Ahtisham wants to
calculate fixed cost, variable cost and break even point. It's a little difficult to do for a new business,
but we can figure it in general.

Steps in Preparing a General Break-Even Analysis

Step 1: Estimate Monthly Fixed Costs

Fixed costs are those that you must pay even if you have no customers. Examples of fixed costs
include rent, utilities, phone, insurance, and Internet costs. Advertising may be a fixed cost if you
must pay for it each month, like phone book ads.

Step 2: Estimate Monthly General Variable Costs

These costs change with the volume of sales. Costs for processing debit/credit cards would be
variable. Employees are often a variable cost, because you can lay off or hire employees as your
sales volume changes.

Step 3: Estimate Monthly Sales Volume and Sales Costs

This can be a difficult number of determine, so you might want to use a "best case" scenario, a
"worst case" scenario, and something in between. Deduct your unit sales cots from your sales
volume. For example, if you sell one unit at rs10 and your sales cost is rs6, your net sales per unit is
Rs4.

Fixed Costs:

Monthly Rent Rs10000

Insurance (600 per year 600/12 months = 50) Rs50

Total Monthly Fixed Costs Rs10050

Variable Cost:

Materials Rs3000

Labor Rs4000

Total Variable Cost Rs7000

Selling Price: Rs11000

Break Even Point Calculation

Break Even Point = Fixed Costs / (selling price - variable costs)

Break Even Point = 10050 / (11000-7000)

Break Even Point = 10050 / 4000

Break Even Point = 3 units.

To break even the company must sell 3 units per month.

The prospects of making a profit is to sell at least 3 engines in order to cover all expenses and costs
and try to sell more parts in order to get greater profit. So different strategies must be apply in order
to increase profit. Like one strategy is to use economies of scale means to reduce cost and sell
greater amount of parts in order to increase revenues.