After finding break-even, compare it with the most the business can actually sell or make. If break-even is higher than capacity, the plan cannot break even as it stands, and the calculation only tells you what has to change.
This lesson is part of profit, cost and cash are different questions. The calculation itself is in calculating contribution and break-even point.
Worked example: handmade bags
An invented artisan makes leather bags and sells each at RM60. Materials and other variable items use RM35 of each sale, and the fixed items total RM9 000 for the month. She can make 4 bags a day and works 22 days.
Contribution = 60 − 35 = RM25. Break-even = 9 000 ÷ 25 = 360 bags. Capacity = 4 × 22 = 88 bags.
The target needs 360 bags, but she can make only 88. At full capacity, the contribution is 88 × 25 = RM2 200, so the result is 2 200 − 9 000 = a loss of RM6 800.
What can change the result?
Test each response with numbers.
| Response | New break-even | Feasible? |
|---|---|---|
| Sell at RM100 | 9 000 ÷ 65 = 138.5, so 139 bags | No, above 88 |
| Cut the fixed items to RM2 000 | 2 000 ÷ 25 = 80 bags | Yes, below 88 |
| Both: fixed items RM2 000 and sell at RM100 | 2 000 ÷ 65 = 30.8, so 31 bags | Yes, well below 88 |
Cutting the fixed items to RM2 000 makes break-even 80 bags. The margin of safety at capacity is 88 − 80 = 8 bags, or only 9% of capacity, so a slow month would bring a loss.
The mistake that stops at the formula
A common slip is to write “break-even is 360 bags” and leaving the question unanswered. The question asks about feasibility, so a comment comparing 360 with 88 is needed.
A full answer states the break-even, states the capacity, says which is larger, and names one realistic change. Numbers without the comparison lose marks.
Check yourself
Each unit sells for RM12 and uses RM7 of variable items, and the fixed items total RM4 000. Capacity is 700 units. Is break-even feasible? What is the result at full capacity?
Answer
Contribution = 12 − 7 = RM5. Break-even = 4 000 ÷ 5 = 800 units.
Capacity is 700, which is below 800, so break-even is not feasible.
At full capacity, profit = 700 × 5 − 4 000 = 3 500 − 4 000 = a loss of RM500.
What to study next
Put it together with cash timing in constructing a cash budget without counting the same receipt twice. Or go straight to the integrated practice set.
For a teacher to shape your feasibility comments, see online one-to-one Accounting tuition.