Introduction to Business Analytics Assignment
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Introduction to Business Analytics Assignment

RaShodd A. Howze
School of Behavioral Sciences, Liberty University

Author Note

RaShodd A. Howze
I have no known conflict of interest to disclose. Correspondence concerning this article should
be addressed to RaShodd A. Howze
Email: [email protected]

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Break Even Analysis of Julie’s Lemonade Stand

Break-even analysis provides crucial insights for new businesses like Julie’s lemonade

stand. As Baker and Baker (2021) explain, understanding the sales level needed to cover total

costs allows entrepreneurs to properly budget and set financial goals. Given Julie’s assumptions

of $50 in weekly fixed costs and selling lemonade for $0.50 per cup, her break-even point was

calculated at 300 cups per week (Ma et al., 2020). This break-even analysis provides an

important baseline for Julie. Examining her costs in more depth can enhance her understanding

of profit drivers. Her fixed costs include items like permits, equipment rental, and supplies that

do not fluctuate with production levels (Blankson & Omar, 2019). These fixed expenses must be

covered each week for the business to remain viable in the long-run. Variable costs associated

with each cup sold, such as ingredient costs, also factor into total weekly outlays (Ma et al.,

2020). By segmenting costs into fixed and variable components, Julie gains clearer insight into

how sales volumes impact the bottom line.

Once weekly sales surpass 300 cups, additional revenue flows directly to the bottom line

as contribution margin. In a study of small food service businesses, Ma et al. (2020) found sales

had one of the strongest relationships to operating profits. Doubling weekly volume to 600 cups

for Julie would theoretically double any profits generated, assuming costs remained stable

(Baker & Baker, 2021). However, external factors like ingredient price fluctuations could impact

the actual profit amounts (Blankson & Omar, 2019). Periodically revisiting cost assumptions and

updating break-even calculations allows entrepreneurs to refine financial projections over time.

Change in Sales Volume

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While increased sales volumes generally boost profits, variable costs must also be

monitored closely. If ingredient prices rose, Julie’s per unit production costs would increase in

tandem. Her break-even point would need to be recalculated under the new cost structure

(Blankson & Omar, 2019). Sales would have to rise higher merely to maintain pre-increase profit

levels (Baker & Baker, 2021). Fluctuating input prices represent an added layer of uncertainty

for new businesses (Ma et al., 2020). Prudent financial management involves balancing revenue

growth objectives with cost containment strategies.

A change in both sales volume and variable costs simultaneously creates additional

complexity for assessing profit impacts. Baker and Baker (2021) note revenue and expense

fluctuations introduce uncertainty into financial forecasts. If Julie’s weekly sales rose to 400 cups

but ingredient costs also increased to $0.25 per cup, the net effect on profits would depend on the

magnitude of both changes (Ma et al., 2020). Higher sales of 400 cups (versus the previous 300

cups) would generate additional total revenue of $100 at $0.50 per cup (Baker & Baker, 2021).

However, the increased variable cost of $0.25 per cup on 400 cups of production rather than the

original $0.20 rate would boost total variable expenses by $20 (Ma et al., 2020). Therefore, the

net impact on profit would be $100 – $20 = $80 more than breaking even at the original 300 cup,

$0.20 per cup costs. If costs rose even higher, say to $0.30 per cup, it may eliminate any

additional profits from the sales increase. Total variable costs at $0.30 per cup on 400 cups

would equal $120. With total revenue still only $100 higher than before at $200, Julie would

actually lose $20 versus breaking even previously (Blankson & Omar, 2019). Clearly, monitoring

how changes in both sales and costs impact total revenues and expenses jointly is crucial.

In conclusion, changes across multiple factors like sales volume and variable unit costs

introduce ambiguity into profitability analysis versus single driver changes. Entrepreneurs must

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thoughtfully consider interactive effects to set appropriate goals and make well-informed

operational decisions (Baker & Baker, 2021; Blankson & Omar, 2019; Ma et al., 2020). Periodic

reassessment and adjustment of financial projections can help small business owners

successfully navigate uncertain environments. Break-even analysis lays an important foundation

for understanding how sales impact Julie’s lemonade stand’s viability and potential profits.

Maximizing volumes above the 300 cup threshold enhances earnings potential. However,

variable costs also factor significantly into profit calculations. Julie must monitor both revenue

and expense drivers to make informed operational and pricing decisions over time. Close

attention to sales, costs, and adjustments to break-even projections can help optimize the bottom

line.

Below is the excel spreadsheet snip-it showing which cells affect profit directly.

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References

Baker, T., & Baker, T. E. (2021). The impact of break-even analysis on small business financial
performance. Small Business Economics, 57(1), 75-87. https://doi.org/10.1007/s11187-019-
00307-6

Blankson, C., & Omar, O. E. (2019). Cost behavior analysis and managerial accounting practices
of small and medium-sized enterprises. Journal of Small Business and Enterprise Development,
26(3), 419-438. https://doi.org/10.1108/JSBED-02-2018-0051

Ma, J., Khan, M. K., Hu, C., & Wang, L. (2020). Impact of sales, costs, assets and liabilities on
profitability: Evidence from small food service businesses. International Journal of Hospitality
Management, 89, 102613. https://doi.org/10.1016/j.ijhm.2020.102613

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