A friend is deciding whether or not to start a business and discusses the matter with you. The business would involve assembling and selling a component that she has invented. She can obtain the parts required from various manufacturers. She has estimated that she can sell 5000 of these components a year at a selling price of $30 per unit. The variable costs of the component are $20 per unit and fixed costs would be $30 000 per annum. These fixed costs do not include a salary for your friend. She currently earns $25 000 per annum in her present job and would have to give this job up if she started her own business. Your friend is rather cautious and she is worried in case any of her estimates are incorrect. 

Required: 

You suggest that she uses cost–volume–profit analysis to help her make the decision and you are required to present examples of such analysis which may be useful to her. The information is to be presented in mathematical form ie break-even point in $, contribution per unit, Break-even point in dollar sales, profit. 

Answer rating: 100% (QA)

Costvolumeprofit CVP analysis is a tool that helps business owners understand the relationships between the cost structure volume of sales and profit ... View the full answer