VIEWS: 1 PAGES: 7 POSTED ON: 10/11/2011
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 7