Where Do We Break Even?

Anita Dawson is doing some financial planning for her music store. Based on her budget for the upcoming year, Anita is expecting net sales of495,000.Sheestimatesthatcostofgoodssoldwillbe337,000 and that other variable expenses will total42,750.Usingthepastyearasguide,Anitaanticipatesfixedexpensesof78,100.

Anita recalls an earlier meeting with her accountant, who mentioned that her store had already passed the break-even point eight-and-one-half months into the year. She was pleased but really didn't know how the accountant came up with the calculation. Now Anita is considering expanding her store into a vacant building next to her existing location and taking on three new product lines. The company's cost structure would change, adding another66,000tofixedcostsand22,400 to variable expenses. Anita believes the expansion could generate additional sales of $ 102,000.

She wonders what she should do.

QUESTIONS:

1. Calculate Anita's break-even point without the expansion.

2. Compute the break-even point assuming that Anita decides to expand.

3. Would you recommend that Anita expands her business? Explain.