Question

Gabrielle and her business partners are starting a new business that sells organic shampoo. After analyzing the market they have a projected sales forecast showing that they must sell 50,000 bottles of shampoo in 12 months to break-even. Calculating the variable unit cost and projected unit price gives a break-even volume of 45,000 bottles. Why should the projected unit price be changed based on the break-even volume?

a.
The break-even volume is too close to the forecasted unit sales.
b.
The break-even volume is much greater than the forecasted unit sales.
c.
The break-even volume is drastically lower than the forecasted unit sales.
d.
The break-even volume is not related to the forecasted unit sales.

Answer 1

a.

Because a break-even of 45,000 is very close to the forecasted 50,000, there is little margin for error. The unit price (or costs) should be adjusted to increase the safety margin so small shortfalls in sales won’t prevent breaking even.