Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
Standard view
Full view
of .
0 of .
Results for:
P. 1
Break Even Point

Break Even Point

Ratings:
(0)
|Views: 850|Likes:

Availability:

See more
See less

12/01/2012

pdf

text

original

1.BREAK-EVEN POINT
The
break-even point
for a product is the point where total revenuereceived equals the total costs associated with the sale of the product(TR=TC).A break-even point is typically calculated in order for businesses todetermine if it would be profitable to sell a proposed product, as opposed toattempting to modify an existing product instead so it can be madelucrative. Break even analysis can also be used to analyse the potentialprofitability of an expenditure in a sales-based business.break even point (for output) = fixed cost / contribution per unitcontribution (p.u) = selling price (p.u) - variable cost (p.u)
Review Problem:
Voltar Company manufactures and sells a telephone answering machine. The company's contribution format income statement for the most recentyear is given below:
TotalPerunitPercent of sales
Sales\$1,200,000\$60100%Less variable expenses900,00045?%---------------------------------------------Contribution margin300,00015?%Less fixed expenses240,000============--------------- Net operating income\$60,000 ====== Calculate break even point both in units and sales dollars. Use the equationmethod.
Solution:
Sales = Variable expenses + Fixed expenses +Profit
1
Finl Assignment of Managerial Accounting

\$60Q = \$45Q + \$240,000 + \$0\$15Q = \$240,000Q = \$240,000 / 15 per unitQ = 16,000 units; or at \$60 per unit, \$960,000
Alternative solution:
X = 0.75X + 240,000 + \$00.25X = \$240,000X = \$240,000 / 0.25X = \$960,000; or at \$60 per unit, 16,000 units
2.CONTRIBUTION MARGIN
The contribution margin method is actually just a short cut conversion of theequation method already described. The approach centers on the ideadiscussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out howmany units must be sold to break even, divide the total fixed cost by the unitcontribution margin.. The Total Contribution Margin (TCM) is Total Revenue (TR, or Sales) minus Total Variable Cost (TVC): TCM = TR − TVC The Unit Contribution Margin (C) is Unit Revenue (Price, P) minus UnitVariable Cost (V):C = P − V The Contribution Margin Ratio is the percentage of Contribution over TotalRevenue, which can be calculated from the unit contribution over unit priceor total contribution over Total Revenue:For instance, if the price is \$10 and the unit variable cost is \$2, then the unitcontribution margin is \$8, and the contribution margin ratio is \$8/\$10 = 80%
3.VARIABLE COST AND FIXED COST
2
Finl Assignment of Managerial Accounting

All the costs faced by companies can be broken into two main categories:fixed costs and variable costs.
Fixed costs
are costs that are independent of output. These remainconstant throughout the relevant range and are usually considered sunk forthe relevant range (not relevant to output decisions). Fixed costs ofteninclude rent, buildings, machinery, etc.
Variable costs
are costs that vary with output. Generally variable costsincrease at a constant rate relative to labor and capital. Variable costs mayinclude wages, utilities, materials used in production, etc.In accounting they also often refer to mixed costs. These are simply coststhat are part fixed and part variable. An example could be electricity--electricity usage may increase with production but if nothing is produced afactory still may require a certain amount of power just to maintain itself.Below is an example of a firm's cost schedule and a graph of the fixed andvariable costs. Noticed that the fixed cost curve is flat and the variable costcurve has a constant upward slope.
3
Finl Assignment of Managerial Accounting