The dollar amount by which sales revenue exceeds what is required to break even.
The number of units by which sales exceed what is required to break even.
8 The Model
The fundamental accounting equation
Profit (?) Revenues - Costs
Revenue SPunits sold
SP selling price
Costs FC VC(units manufactured)
FC fixed cost
VC unit variable costs.
We are assuming that units manufactured equal units sold
9 What if we want to know how much product we must sell to break even? The breakeven point is the point where profit is zero, so ?? 0 Revenue - Cost SPunits sold - FC - VCunits sold (SP - VC)units sold - FC units sold FC/(SP - VC) We will call units sold at ?? 0 BEunits 10 Breakeven revenue Breakeven units (BEunits) SP, or SP BEunits SP(FC/CM) Breakeven revenue FC/(CM/SP) 11 Cost-Volume-Profit Graph Total Revenue Revenue Profit Total Cost Y Loss X Unit sold X Break-even point in units Y Break-even point in revenue 12 Profit-Volume Graph I (P - V)X - F Profit Slope P - V Units Loss Break-Even Point In Units - F 13 Assumptions underlying CVP analysis
In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold.
The behavior of total revenue is linear (straight line). This implies that the price of the product or service will not change as sales volume varies within the relevant range.
14 Assumptions underlying CVP analysis
The behavior of costs is linear (straight line) over the relevant range. This implies the following more specific assumptions.
a. Costs can be categorized as fixed, variable, or semi-variable. Total fixed costs remain constant as activity changes, and the unit variable cost remains unchanged as activity varies.
b. The efficiency and productivity of the production process and workers remain constant.
15 Assumptions underlying CVP analysis
In multi-product organizations, the sales mix remains constant over the relevant range.
In multi-product organizations, when we do a single CVP analysis, we assume the products all are sold in the same market. Substitutes.
This means that the product mix does not change in response to changes in production/sales volume.
16 Example 1 equation approach
Movie theater 48,000 monthly fixed costs
8 ticket price.
2 variable cost per ticket.
Give breakeven units and revenue
BEunits 48,000/(8 - 2)
BEunits 8,000 tickets.
17 (No Transcript) 18 Example 1 Contd
Suppose practical capacity per month is 12,000 tickets and that the movie theater has operated at 60 capacity during December. It is now December 30.
Has the theater made money in December?
If they could capture 1,000 customers by lowering the ticket price to 7 for New Years Eve, should they do it?
19 Example 2
Data The Doral Company manufactures and sells pens. Present sales output is 5,000,000 per year at a selling price of .50 per unit. Fixed costs are 900,000 per year. Variable costs are .30 per unit.
What is the current yearly operating income?
What is the current breakeven point in sales dollars?
20 Example 2 Contd
Compute the new operating income if . . .
1. A .04 per-unit increase in variable costs.
2. A 20 decrease in fixed costs, a 20 decrease in selling price, a 10 decrease in variable costs, and a 40 increase in units sold.
21 Example 2 Contd
Compute the new breakeven point in units for
each of the following changes.
A 10 increase in fixed costs
A 10 increase in selling price and a 20,000 increase in fixed costs.
22 Example 3 The Rapid Meal has two restaurants that are open 24 hours per day. Fixed costs for the two restaurants together total 450,000 per year. Service varies from a cup of coffee to full meals. The average sales check for each customer is 8.00. The average cost of food and other variable costs for each customer is 3.20. The income tax rate is 30. Target net income is 105,000. 23 Example 3 Contd
Compute the total dollar sales needed to obtain the
target net income.
How many sales checks are needed to break even?
Compute net income if the number of sales checks
24 Multiple-Product Example Assume the following Regular Deluxe Total Percent Units sold 400 200 600 ---- Sales price per unit 500 750 ---- ---- Sales 200,000 150,000 350,000 100.0 Less Variable expenses 120,000 60,000 180,000 51.4 Contribution margin 80,000 90,000 170,000 48.6 Less Fixed expenses
130,000 Net income
40,000 1. What is the break even point? 2. How much sales revenue of each product must be generated to earn a before tax profit 50,000?