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Break even analysis is the technique which is used to calculate the break-even point and assist managers in making key decisions. The break-even point of production is that level of output at which total costs equal to total revenue.
In the above case, Katie is planning to make security badges in his business. However, before taking a final decision it is really important for Katie to perform break even analysis. This can be done through an equation method where the break-even point in units and in dollars can be calculated from the given data.
The formula for the break-even point is,
Break-even point = Total fixed cost / sales per unit – variable cost per unit

By taking the appropriate figures from the data the break-even point can be calculated in this way.
Break-even point = Total fixed cost / sales per unit – variable cost per unit
BEP = ((500*12) + 410 + (150*12) +1875) / (4.85 – 2.65 – 1.08)
BEP = 10085 / 1.12
BEP = 9004 units
The break-even point suggests that Katie must need to sell more than 2621 number of badges in order to earn a profit. If the lower amount of badges are sold as compared to the break – even level than the company would incur a loss.
Similarly the break-even dollars shows the amount of revenue which needs to generate in order to earn neither a profit nor a loss. The break even in dollars can be calculated by the formula
BEP in dollars = BEP point * selling price per badge
By taking appropriate figures from the data, the break even in dollars would be,
Break even in dollars = BEP in units x selling price per unit
BEP in dollars = 9004 x 4.85
BEP in dollars = $ 43,672
This shows that the Katie business needs to generate $ 43, 672 in order to satisfy the situation of revenue = cost.
However in terms of financial leverage Katie can decide whether to borrow the money or not.
The two reasons to borrow the money would be,

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