You Be the Consultant: "Where Did We Break Even?"
Case study below and answer the questions that follow.
Final paper should not be less than 4 to 5 pages and references must be provided. 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 of $495,000. She estimates that cost of goods sold will be $337,000 and that other variable expenses will total $42,750. Using the previous year as a guide, Anita anticipates fixed expenses of $78,100.
Anita recalls an earlier meeting with her accountant, who mentioned that her store had already passed the break-even point 8 and 1/2 months into the year. She was pleased, but really didn't know how the accountant had come up with that calculation.
Now, Anita is considering expanding her store into a vacant building next store to her existing location and taking on three new product lines. The company's cost structure would change, adding another $66,000 to fixed costs and $22,400 to variable expenses. Anita believes the expansion could generate additional sales of $102,000. She wonders what she should do.
1. Calculate Anita's break-even point without the expansion plans. Draw a break-even chart.
2. Compute the break-even point assuming that Anita decides to expand.
3. Would you recommend that Anita expand her business? Explain.