# George wants to know how many boxes of chocolate bars he needs to sell for $25.00 to break even....

## Question:

1. George wants to know how many boxes of chocolate bars he needs to sell for $25.00 to break even. He estimates fixed operating costs of $12,500 per year and variable operating costs of $15 per box.

How many boxes must he sell to break even on operating costs?

2. George incorporates, issues 1,000 shares of common stock and declares dividends of $2 per share for the first year. He estimates his growth rate at 3% and required return is 5%.

How much is his company worth?

3. The Board of Directors of George's corporation declares a dividend to shareholders of record on Thursday April 30, 2015. When is the last day you can purchase stock in George's corporation and still receive the dividend?

## Break-Even Analysis:

The break-even point (BEP) is the point where a company earns no profit and incurs no loss; it's calculated as: BEP = Fixed cost / Contribution Per Unit. A company's worth is the total value of the organization on a given date; it's usually computed by multiplying the outstanding shares by the market price of the stock.

## Answer and Explanation: 1

**Part 1**

- Break even point in units = Fixed cost / Contribution per unit
- Contribution per unit = Selling price - variable cost
- Contribution per unit = $25 - $15 = $10
- Given fixed costs = $12,500
- Break even point (units) = $12,500 / $10 = 1,250 units

Hence, George is required to sell 1,250 units in order to break even.

**Part 2**

Here we need to compute the value/price of the stock first.

Stock Value = Dividends per share (DPS) / (Required return - Growth rate)

Stock Value = $2 / (5% - 3%) = $100

Company's worth = 1,000 shares * $100 per share = $100,000

**Part 3**

In order to qualify for a dividend receipt, one should buy the stock *three days* before the record date, which is April 27, 2015, as April 30, 2015, is the record date.

#### Learn more about this topic:

from

Chapter 5 / Lesson 28See how to calculate break-even point (in units and dollars). See the variables of the break-even point formula and examples. Understand the purpose of break-even analysis.