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Variable Costs

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									Breakeven Analysis
Variable Costs
Vary directly in proportion to activity:
Example: if sales increase by 5%, then
the Variable Costs will increase by 5%
Fixed Costs
Remain the same, regardless of the
activity level
Mixed ________
Combines variable and fixed costs




   Variable Costs
 Variable Costs VARY directly in proportion
 to the changes in Activity Level

       Sales                10%


 Variable Costs 10%

 If the activity level (sales) increases 10%,
 then Variable Costs will increase _____% also




Examples of Variable Costs
          Raw Materials
          Production Labor __________
          Variable Overhead
          Sales Commissions
          Shipping Costs
          Factory Power




                                                 1
      Examples of Fixed Costs
                   Depreciation
                   Rental ____________
                   Building Insurance
                   Automobile Insurance
                   Property _________
                   Plant Repair




     GRAPH OF VARIABLE COSTS

           $
 No activity
 = zero costs            Variable
                         Costs
 More activity
 means more
 costs


 Begin at the ______ (zero, zero) and
 draw the line to the upper right
                                         Q




      GRAPH OF FIXED COSTS

           $
Begin at Y-axis
and draw            Fixed
horizontal _____    Costs



                                    Q
                            Quantity in terms of
                            units sold or produced




                                                     2
    Fixed Cost + Variable Cost
       equals TOTAL COSTS
                                               TOTAL
           $                                   COST
                                               LINE
Add the height
of the Variable                            Variable
Cost Line to                               Costs
the height of
Fixed Cost Line                            Fixed
                                           Costs


 At the Y axis, variable costs = 0
 So Total Costs = Fixed Costs         Q




     GRAPH OF TOTAL COSTS

           $
                        TOTAL
                        COST
                        LINE
                                           Variable
                                           Costs




                                               Q
In other words, stack the Variable Cost Line
on top of the Fixed Cost Line




               REVENUES &
               TOTAL COSTS
               $
                          Breakeven             Total
                            Point
Breakeven Point is                              Costs
crossing point of
Revenue line and              Revenue – Cost = 0
Total Cost line              so Net Income is zero
                              at Breakeven Point


                                          Q



                                                        3
     Revenues < Costs = Loss

              $                              Revenue

                     When Quantity
                     is less than                Total
                     Breakeven                   Costs
Total Costs are
more than (above)
Revenue, so Net
Income is a ______

           Net Income = Revenue - Cost           Q




     Revenues > Costs = Profit

     $        When Quantity
                                        Revenue
              is more than
              Breakeven                 Total
              Point                     Costs

                      Then the Revenue line is
                  above (higher) than Total Cost
                  line, so Net Income is a ______

                                             Q
            Net Income = Revenue - Cost




            CONTRIBUTION
  Unit Contribution = Price - Variable Cost per unit

                        OR
                        (Sales – Total Variable Costs)
Contribution Margin =
                                     Sales


 Use the Units Contribution (top) formula when
 the problem is in units, but use the Contribution
 Margin (bottom) formula instead when the problem
 gives the Total Sales and Total ______________ Costs




                                                         4
   BE = Fixed Cost ÷ Contribution

                              Fixed Costs
Breakeven Units =
                         (Price – Variable Cost)

                      OR
                              Fixed Costs
Breakeven Sales =
                      (Sales-Variable Cost)÷Sales
Use the BE Units (top) formula when the problem is
in units, and the BE Sales (bottom) formula when the
problem gives Total ________ and Total Variable Costs




        BREAKEVEN UNITS
                              Fixed Costs
 Breakeven Units =
                         (Price – Variable Cost)

 Example: Acme Manufacturing’s Fixed Costs are
 $120,000 per period, and the price per Roadrunner
 Trap is $25 while the Variable Cost per trap is $20


     Breakeven Units = $120,000 ÷ ($25 - $20)




        BREAKEVEN SALES
                        Fixed Costs
Breakeven Sales =
                (Sales-Variable Cost)÷Sales
  Example: Acme Manufacturing’s Fixed Costs are
  $120,000 per period, while the sales are $750,000
  and variable costs are $600,000
                                $120,000
 Breakeven Sales =
                     ($750,000-$600,000)÷$750,000




                                                        5
    Comparison of BE Points
 Example: Acme Manufacturing’s Fixed Costs are
 $120,000 per period, and the price per Roadrunner
 Trap is $25 while the Variable Cost per trap is $20
 Acme sold 30,000 traps for a total of $750,000 in
 sales and $600,000 in variable costs
                              Fixed Costs
 Breakeven Units =
                         (Price – Variable Cost)
    Breakeven Units = 24,000 Roadrunner Traps
                         Fixed Costs
Breakeven Sales =
                 (Sales-Variable Cost)÷Sales
    Breakeven Sales = $600,000
  24,000 traps at $25 price each equals $600,000




            Net Income = Y
 Example: Acme Manufacturing’s Fixed Costs are
 $120,000 per period, and the price per Roadrunner
 Trap is $25 while the Variable Cost per trap is $20
 Compute the Net Income if Acme sells 32,000 traps

Net Income = Price*Q –Variable Cost*Q – Fixed Cost

Net Income = $25*32,000 – $20*32,000 – $120,000




            Y = Net Income
 Example: Acme Manufacturing’s Fixed Costs are
 $120,000 per period, and last year Acme sold
 30,000 traps for a total of $750,000 in sales and
 $600,000 in variable costs
 Compute projected Y if projected sales = $800,000
Variable Cost Percentage = (VC÷Sales) last year sales
AND Net Income = Sales – (VC% * Sales) – Fixed Cost
Variable Cost %= $600,000 ÷ $750,000 = .800 VC%
Net Income = $800,000 – (.800*$800,000) – 120,000




                                                        6
    Comparison of Net ________
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and the price per Roadrunner
Trap is $25 while the Variable Cost per trap is $20;
and last year Acme sold 30,000 traps for a total of
$750,000 in sales and $600,000 in variable costs
Compute the projected Net Income if next year Acme
sells 32,000 traps for total sales of $800,000
Net Income = Price*Q –Variable Cost*Q – Fixed Cost
Net Income = $800,000 – $640,000 – $120,000
Net Income = $40,000
Variable Cost Percentage = (VC÷Sales) last year sales
AND Net Income = Sales – (VC% * Sales) – Fixed Cost
Net Income = $800,000 – (.800*$800,000) – 120,000
Net Income = $40,000




   SUMMARY of TERMS
  Variable Costs vary directly with the activity level

  Fixed Costs are assumed to stay the same

  Mixed Costs consist of both variable & fixed costs

  Total Cost = Variable Costs + Fixed Costs

  Breakeven Pt is where Total Cost = Total __________




     SUMMARY OF FORMULAS
     UNITS                 Total Sales&Costs
    Breakeven Units           Breakeven __________
      Fixed Costs                 Fixed Costs
(Price – Variable Cost)   (Sales-Variable Cost)÷Sales
  Projected Income        Projected Income
Projected Quantity = Q      Last year’s numbers
PQ – VQ – Fc = Y       VC% = (Variable Cost ÷ Sales)
                            Projected Sales & FC
                          S – (VC% * S) – Fc = Y
 Use Units (left) formulas when problem is in units,
 and Total Sales&Costs (right) formulas when the
 problem gives Total Sales and Total Variable Costs




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