34

COST-VOLUME PROFIT ANALYSIS

Today the manager is a principal factor in the success or failure of any business enterprise. The primary function of management is to make a profit for the firm. Essentially, profit is generated by effective sales and/or distribution of products or services. Any decision-making organization actively concerned with profits will find itself involved in the analysis of costs and revenues. ince the firm must first recover its costs before it can make a profit. There are definite relationships between costs, revenues and profits. There are three levels of activity that are of the greatest concern to the management of any profit-seeking business. 1. Break-eve poi t The activity level at which the firm has e!actly enough revenue to recover all costs. !. T"e fir# i$ operati % at a &o$$. The revenue that is penetrated is not sufficient to recover all costs that have been incurred "Total costs # Total $evenue %. &. T"e fir# #a' (e operati % at profit. The revenue of the firm completely recovers the costs and has funds left over. Pro)*+tio ,P*r+"a$i %- +o$t$ These are costs incurred in making or ac'uiring products for sale. Pro#otio a& Co$t$ These costs are the costs that are associated with the creating of consumer interested in the product. "advertisements% Co$t Fa+tor$ .e era& A)#i i$tratio Co$t$ This category includes those costs that are incurred in the day-to-day operating of the firm "salaries, heat%. Marketi % Co$t$ These are any costs associated with preparing ( distributing the product throughout the sales territories "packaging, shipping, e!penses of traveling sales representatives%. $evenue ) *nit "sales% elling +rice , ales " in units %

-n .ecision making process, it is more useful to classify costs as follows / 0i!ed 1ost / A cost that remains constant "within a specified range% regardless of the level of operations. "Ta!es, salaries for e!ecutive personnel% 2ariable 1ost ".irect costs% / are cost which fluctuate in direct proportion with the level of manufacturing output or unit sales. unk 1osts / are previous investments which have no effect on a current decision. Tota& Co$t / Tota& Fi0e) Co$t 1 Tota& Varia(&e Co$t

33 1ost Total 1ost 2ariable 1ost 0i!ed 1ost

*nits
0ig.5 / 6raphic representation of costs.

-n the analysis of 7E+, much attention is given to the concept of contribution. Co tri(*tio 2 * it / Se&&i % Pri+e 2 * it - Varia(&e Co$t 2 * it e.g.. elling +rice / *nit - 2ariable 1ost / unit 1ontribution / *nit 89.:; <* 59.:; <* 5;.;; <*

Li ear A a&'$i$ Total $evenue "Total -ncome% E Total 1ost > -ncome 1ost +rofit 7E+"<*% 7reak-even 2ariable 1ost ?oss 0i!ed 1osts *nits 7E+ "units%
0ig.8/ 7reak-Even point.

) ) ) )

elling +rice / *nit , ales " *nits% + , Total 0i!ed 1osts = Total 2ariable 1osts 0 = v! E " p, !% > "0 = v!%

At 7reak-Even / E ) > p!) 0 = v! p!- v! ) 0 !"p- v% ) 0

5;;

X; =

F p v

7reak Even "units% )

Fixed Cost UnitSelling price var iable cos t / unit Fixed Cost M arg inal revenue M arg inal cos t

7reak Even "units% )

E0a#p&e 1 Total 1ost ) 8;; = : , Total $evenue ) 9 , Application of formula 7E ) X ; = or

F 8;; ) ) 5;; units MR MC 9 :

0i!ed 1ost ) 8;; <* <arginal $evenue ) 9 <* <arginal 1ost ) : <*

9 , ) 8;; = : , 9 , - : , ) 8;; 8 , ) 8;; , ) 5;; units The firm must produce and sell 5;; units. -f the firm produces and/or sells than 5;; units it will incur a loss, if it produces and sells more than 5;; units, it will make a profit. Break-Eve i MU
X; p = F p p v
X ; " MU % = F 5 v p

7E "<*% ) Break-Eve a$ 3 Capa+it'

BE "@% =

F 5;;@ " p v%"unit capacity t %

or

BE "@% =

F 5;;@ "5 v / p % t p

5;5

E0a#p&e ! .emir 0urniture 1o. manufactures and sells bedroom suites. Each suite costs 8:;<* and sells for A;; <*. 0i!ed costs at .emir 0urniture total 9: ;;; <*. .etermine the 7reakEven point using a%. Algebraic analysis b%. The general formula approach So&*tio 4 .ata ummary / *nit selling price ) A;; <* 1ost per unit ) 8:; <* Total fi!ed cost ) 9:;;; <*

a% *se of the algebraic approach re'uires us to e'uate the total revenue e'uation and the total cost e'uation. The breakeven point is the output ",;% where this e'uality is valid. T$ ) T1 E ) > p, ) 0 = v, A;; , ) 8:; , = 9:;;; A;; , B 8:; , ) 9:;;; ,; ) :;; units .emir 0urniture 1o. has a breakeven point of :;; units. b% The general formula approach for strict breakeven re'uires the use of following formula 7E )

X; =

F p v )

9:;;; ) :;; units A;; 8:;

The breakeven point e'uals :;; units. E0a#p&e 5 7est 1ut hops ?td. Cperates 5; haircut shops in 0amagusta on a 8:;-days-per-year, 4 hours-per day basis. They charge 5; <* for a haircut. Cne shop has annual fi!ed costs of 4A;;; <* and variable costs estimated at & <* per customer. a% Dhat is the contribution per customerE b% Fow many customers per hour must the shop average in order to break evenE So&*tio 4 a% 1ontribution ) p B v ) 5; <* B &<* ) 9 <* per customer b%

X; =

F p v ) 4A;;;
5; &

4A;;; = 58;;; customers/year 9

5;8

i.e. E0a#p&e 6

58;;; Customer / year =G "8:; days / year %"4 ours / day %

customers/hour

-f fi!ed costs are A;;;; <* and available costs are estimated at :;@ of the unit selling price of 5G; <*, what is 7E+E So&*tio 4

X; =
E0a#p&e 7

F p v)

A;;;; = :;; units 5G; 4;

The owners of a professional football team have leased a &;;;;-seat-stadium for si! games for a fi!ed cost of 5G4;;;; <*. They e!pect variable costs to run A <* per spectator and tickets will sell for an average of 8A <* each. Fow many tickets, on average, must be sold per game for the owners to Hust break evenE So&*tio 4

X; =

F p v ) 5G4;;;; = 5G4;;;; = 4A;;; seats / year

8A A 8;
4A;;; seats ) 5A;;; seats / game G games / year

Seats / game =

E0a#p&e 8 A computer company plans to produce &;;;; computers ne!t year. They will sell for 9;; <* each. The fi!ed cost of operation care : million and total variable costs are G million <*. Dhat is the break-even pointE So&*tio 4

X; =

F p v

where

v=

G;;;;;; MU ) 8;; <* / unit &;;;; units

:;;;;;; MU X; = ) 5;;;; units "9;; MU 8;; MU % / unit

5;& E0a#p&e 9 A .2. player sells for &:; <* and has variable cost of 4: <*. a% 0ind the contribution b% 0ind the contribution ratio So&*tio 4 a% 1ontribution ) p Bv ) &:; <* B 4: <* ) 8G: <* b% 1ontribution margin = E0a#p&e : -zmir hoe-1ity ?td. +roduces 8A;;; pairs of running shoes per month. Annual fi!ed costs are 4A;;;; <* and the contribution from each pair is G;@ of their 8; <* per-unit selling price. 0ind the break-even volume. So&*tio 4
X; = F 4A;;;; = = p v 58 p v v 4: 8G: =5 =5 = = ;.9G p p &:; &:;

9;;;; pairs

Dhere p B v ) ;.G; "8;% ) 58

or

X ; " MU % =

F 5 v p

4A;;;; = 5A;;;;; ;.G <*

X ; "Units% =
E0a#p&e ;

5A;;;;; MU = 9;;;; pairs 8; MU / unit

Turkish airlines offers customers a vacation plan for :8; <*. The Airline estimates that the fi!ed costs associated with this plan are 98;;;; <* and at a volume of &;;; passengers total variable cost would be A4;;;; <* and profits should be &G;;;; <*. a% 0ind the break-even volume b% -f fi!ed costs remained constant, how many additional passengers "beyond 7reakeven% would be re'uired to increase profits to :;;;;; <*E So&*tio 4 a% X ; = p v = :8; 5G; = 8;;; passengers 5G;<*/passenger
F 98;;;;

Dhere v =

A4;;; = &;;;

b% 1ontribution ) p B v ) :8; B 5G; ) &G; <*/passengers I of passenger )

:;;;;; = 5&43 passengers &G;

or J ) " T B 7E+ %" p B v % :;; ;;; ) " ,5 B 8 ;;; %" &G; % ,5 ) & &43 passengers 5 &43 additional passengers over break-even point.

5;A

E0a#p&e 1< 1yprus +acking ?td. +ackages orange Huice in &;; cl. B cans which they sell to grocery distribution warehouses for A4 <*/case. The packing company has fi!ed costs of &8A;;; <* and variable costs of &; <*/case. The plant has a capacity of 5;;;;; cases per season. a% 0ind the contribution b% Fow many cases must be sold to break-evenE c% Dhat is the profit "or loss% if the plant operates at full capacity for the seasonE So&*tio 4 a% 1ontribution ) price/unit B variable cost/unit ) p B v ) A4 <*/case B &; <*/case ) 54 <*/case

F &8A;;; MU / season b% X = = = 54;;; cases / season ; p v 54 MU / case

b% ) "5;;;;; B 54;;;% "54% ) 5A9G;;; <* E0a#p&e 11 Azim Electronics has the capacity to produce &;;;; networking devices per year at a plant in 1yprus. Their variable costs are 58 <*/*nit. They are currently operating at 4;@ of plant capacity, which generates a revenue of 98; ;;; <*/year, at current volume, the fi!ed costs are &G;;;; <*. a% Dhat is the current annual profit or lossE b% Dhat is the break-even 'uantityE c% Dhat would be the firmKs profit, if they could operate at 3:@ of capacityE So&*tio 4 a% 1urrent volume ) 4;@ " &;;;; units% ) 8A;;; units +rofit ) ) T$ B T1 ) 98;;;; <* B " &G;;;; = 8A;;; ! 58 % ) 98;;;; B "&G;;;; = 844;;;% ) 98;;;; B GA4;;; ) 98;;; <*

b%

98;;;; MU "!R% p= = &; MU / unit 8A;;; units " X %

X; = &G;;;; &G;;;; = = 8;;;; units &; 58 54

c% Dhat would be the profit for 3:@ of capacityE

5;: 1apacity ) 3:@, 2olume ) ;.3: "&;;;;% ) 84:;; units ) " ales 2olume B 7E+% "1ontribution% ) "84:;; B 8;;;;% "54% ) 5:&;;; <* E0a#p&e 1! Tahil Ticaret 1ompany has &; employees and handles 5:;; loads per year of grain from a konya warehouse. The firm has fi!ed costs of 9;;;; <*/year and variable costs of 59; <*/load. The production and operations manager is considering installing an 4;;;; <* automated material handling system that will increase fi!ed costs by 8;;;; <*/year. -t will also increase the per unit contribution of each load by 8; <*. The firm operates 8:; days/year and they receive an average of &;; <* revenue for each load passed through the warehouse. a% what is the current annual profit "or loss%E b% Dhat is the new 7E+ volume if the investment is madeE So&*tio 4 a%

X; =

F 9;;;; 9;;;; = = = :&4.AG units p v &;; 59; 5&;

) "5:;; B :&4.AG% "&;; B 59;% ) 58:;;; <* or ) T$ B T1 ) 5:;; "&;;% B [ 9;;;; = 5:;; "5:;% ] ) A:;;;; B &8:;;; ) 58:;;; <* b% Lew 0i!ed 1ost ) 9;;;; = 8;;;; ) 3;;;; <* 1ontribution ) &;; B 59; ) 5&; <* Lew 1ontribution ) 5&; <* = 8; <* ) 5:; <*

X; =
E0a#p&e 15

F 3;;;; = = G;; units p v 5:;

+rocess A has fi!ed cost of 4;;;; <* per year and variable cost of 54 <*/unit, whereas process 7 has fi!ed costs &8;;; <* per year and variable costs of A4 <*/unit. At what production 'uantity ,; are the total costs of A and 7 e'ualE So&*tio 4 et total costs e'ual / T1A ) T17 0A = 2A , ) 07 = 27 , 4;;;; = 54 , ) &8;;; = A4 , A4;;; ) &; , ,; ) 5G;; units

E0a#p&e 16 A firm has annual fi!ed costs of G.A million <* and variable costs of 5A <*/unit. -t is considering and additional investment of 5G;;;;; <*, which will increase the fi!ed costs by &;;;;; <*/year and will increase contribution by A <*/unit. Lo change is anticipated in the sales volume or sales price of &; <*/unit.

5;G Dhat is the 7E 'uantity if the new investment is madeE So&*tio 4 The A <* increase in contribution will decrease variable cost per unit to 5A<* B A <* ) 5; <*/unit The addition to 0i!ed 1osts makes them G.A million = &;;;;; <* ) G.9 million <*

X; =
E0a#p&e 17

F G9;;;;; = = &&:;;; units p v &; 5;

<ohuiddin 1omputer ?td. +roduces a computerized monopoly game and wishes to establish a break-even analysis report. The game sells for &9.:; <* each, but volume has never been dropped below A;;; units and the costs are not accurately classified into fi!ed and variable costs. Although 98;;; <* of costs are reported as Mfi!edN, some of the MvariableN cost items "e.g selling and administrative% have fi!ed components. The following cost data is available for two representative volumes. 1osts at volume of A;;; units 58;;; units 8;;;; <* A;;;;<* :;;;; 55;;;; 94;;; 44;;; &;;;; A;;;; 594;;; <* 894;;; <* 98;;; 98;;; 8:;;;; <* &:;;;; <*

?abor <aterial Cverhead ell( Adm. Total other costs >nown fi!ed costs

So&*tio 4

a% The slope of the total cost line, i.e.

c ange in !otal Costs c ange in !otal "uantity

, gives us

the variable cost / unit.

5;9

&:; ; MU 8:; ; MU 5; ; ; MU v= = = 8.5 :; 58; ; units A; ; units 4; ; units

<*/unit

b% -n order to find fi!ed costs, we can subtract total variable cost from total cost of either for A;;; units or 58;;; units. 0 ) Total 1ost O A;;; units B A;;; ! 58.:; ) 8:;;;; <* B :;;;; <* ) 8;;;;; <* c% 1ontribution is ) p B v ) &9.:; <* B 58.:; <* ) 8:.;; <*/unit d%

X; =

8;;;;; = 4;;; units 8:

e% Estimation of profit at a volume of 5;;;; units +rofit ) T$ BT1 ) "5;;;; ! &9.:;% B "8;;;;; = 5;;;; ! 58.:;% ) :;;;; <* or ) "Total ales B 7E+% "p B v% ) "5;;;; B 4;;;% "&9.:; B 58.:;% ) :;;; <* E0a#p&e 18 1heap- hot $etailing is currently purchasing a certain commodity at a cost of 9 <*/unit and is selling the item at a price 5; <*/unit. Total fi!ed cost is 5:,;;; <*. An offer is made by the wholesaler to provide the item at a cost of G <*/unit, if 1heap- hot will guarantee a minimum annual purchase of 9,:;; units. -n considering the offer, it is determined that acceptance will re'uire a 8;@ increase in fi!ed costsP and, because of the reduced unit cost, the product could be sold at a 5:@ lower price than the current retail price. The current sales level is G,;;; units per yearP it is estimated that the price reduction will increase sales by &;@. hould the offer be accepted or reHectedE So&*tio 4 .ata ummary/ 0i!ed 1ost 2ariable cost/unit *nit elling price Estimated ales level "units% *nits +urchased 1urrent Cperating .ata 5:;;; <* 9 5; G;;; G;;; +roHected Cperating .ata A;;;;<* G 4.: 94;; 94;;

Q 0.1ost ) 5:;;; <* = ;.8; "5:;;; <*% ) 54;;; <* . +rice / unit ) 5; <* B ;.5: "5;<*% ) 4.:; <* ales "units% ) G;;; = ;.&; "G;;;% ) 94;; units

5;4

a% <ethod 5 / 7reak-Even Analysis

5:;;; = :;;; units "0or current operations% 5; 9 54;;; X ;8 = = 98;; units "0or proHected operations% 4.: G X ;5 =
Acceptance of the wholesalerKs offer will increase the 7E+R from its current level of :;;; units to 98;;; units, a AA@ increase. This, in turn, will $E.*1E the sales above the 7E+ from 5;;; units "G;;; B :;;;% to G;; units "94;; B 98;;%. .ecision / The wholesalerKs offer should LCT be accepted. b% <ethod 8 / 1ost-+rofit Analysis i. 1urrent operations ) "G;;; B :;;;% "5; B 9% ) 5;;; "&% ) &;;; <* or Total $evenue / 5; "G;;;% ) G;;;; <* Total 1ost / 5:;;; = 9 "G;;;% ) :9;;; <* +rofit / &;;; <* The current operation produces a profit of &;;; <*. ii. or Total $evenue / 4.: "94;;% ) GG&;; <* Total 1ost / 54;;; = G "94;;% ) GA4;; <* +rofit / GG&;; B GA4;; ) 5:;; <* The proHected operation will result in a profit of only 5:;; <*. .ecision / The wholesalerKs offer should be reHected because it will decrease the profit level. E0a#p&e 19 A71 -nc., operates a medium-sized assembly line. At the present time the management of A71, -nc., is considering the addition of a new press to its assembly operation. -f the press is added, it will reduce variable cost by 8;@ per unitP however, the cost of the new press will increase fi!ed cost-by 9:,;;; <*. Assuming no other change, and given the following current operating data, determine whether or not the new press should be purchased. 1urrent operating data/ 0i!ed cost 8:;,;;; <* +roHected Cperations ) "94;; B 98;;% "4.: B G% ) G;; "8.:% )5:;; <*

5;3 2ariable cost per unit *nit elling price +roHected ales So&*tio 4 .ata ummary. 0i!ed 1ost *nit elling price *nit variable cost +roHected ales "units% a% <ethod 5 / current operations / BE = X ; = Lew +ress 1urrent Cperating 8:;;;; <* G: <* A; <* 8;;;; Addition of Lew +ress &8:;;;<* "increased by 9:;;;<*% G: <* "no change% &8 <* "reduced by 8;@% 8;;;; A; <* G: <* 8;,;;; units

F 8:;;;; = = 5;;;; units p v G: A; F &8:;;; BE = X ; = = = 34A4.A3 units p v G: &8

*nder linear analysis, the best decision with a fi!ed level of output is simply Mselect the program that has the lowest breakeven volumeN. A71 -nc. should install the new press. Although this decision will increase fi!ed costs by 9:;;; <*, it will decrease unit costs enough to more than compensate for the change. b% <ethod 8 / total contribution analysis 1urrent Cperations Total $evenue / 5&;;;;; <* - 1ost of 6oods sold 4;;;;; <* 6ross <argin "contribution% :;;;;; <* - Total fi!ed cost 8:;;;; <* +rofit 8:;;;; <* Addition of Lew press 5&;;;;; <* GA;;;; <* GG;;;; <* &8:;;; <* &&:;;; <*

Cr "current operations% ) "8;;;; B 5;;;;% "G: B A; % ) 5;;;; "8:% ) 8:;;;; <* "new press% ) "8;;;; B 34A3% "G: B &8% ) 5;5:5 "G:-&8% ) &&A34& <* *sing total contribution analysis, addition of the new press will increase profit from 8:;,;;; <* to &&:,;;; <*. A71 -nc., should install the new press. E0a#p&e 1: A producer of digital cameras sells his product through a credit card firm at G; <* each. The production costs at volume 5;,;;; and 8:,;;; units are as follows/ ?abor <aterials 5;,;;; units 58;,;;; <* 8A;,;;; 8:,;;; units 8;;,;;; <* A;;,;;; .

55; Cverhead "0 = 2% elling ( administration .epreciation ( other fi!ed cost 54;,;;; 5;;,;;; 5G;,;;; ----------------Total 4;;,;;; <* ----------------*se the data to determine the 7E+. So&*tio 4 88;,;;; 58;,;;; 5G;,;;; ----------------5,5;;,;;; <* -----------------

Lote that the slope of the total cost line "that is, change in S/change in ,% is the variable cost per unit.

# c ange in !otal Costs 55;;;;; 4;;;;; v= = = X c ange in !otal "uantity 8:;;; 5;;;;
v= &;;;;; = 8; <* / unit 5:;;; X; = G;;;;; G;;;; = = 5:;;; units G; 8; A;

-n order to find 0i!ed 1osts, we can subtract total variable cost from total cost of E.6. 5;;;; units. 0 ) Total 1ost O 5;;;; units B 5;;;; ! 8; ) 4;;;;; B 8;;;;; ) G;;;;; <*

E0a#p&e 1; .ata for a break-even analysis revealed that total costs at volumes of G;; and 4;; units were 5G;,;;; <* and 538,;;; <* respectively. $evenue is 844 <*/unit. 7ased upon this information, what are a%. the variable costs per unit b%. the fi!ed costs So&*tio 4 a%

!otal Cost 538;;; 5G;;;; &8;;; = = = 5G; <*/unit 2ariable 1ost = $uantity 4;; G;; 8;;

b% 0 ) T1OG;; - v!OG;; ) 5G;;;; B G;; "5G;% ) 5G;;;; B 3G;;; ) GA;;; <* E0a#p&e !< 6uzel Favuz ?td. ells their product for G,;;; <* each, at a volume of 8; units, their labor, materials, overhead and other costs total is 58;,;;; <* and at a volume of A; units the total is 5G;,;;; <*.

555 a% b% c% d% So&*tio 4 a% v = Dhat is your best estimate of the variable cost per unitE Estimate the fi!ed costs. At what volume does the firm break-evenE Estimate the profit at a volume of G; units.

!otal Cost 5G;;;; 58;;;; A;;;; = = = 8;;; <*/unit $uantity A; 8; 8;

4;;;; 4;;;; = = 8; units G;;; 8;;; A;;;

b% 0 ) T1O8; - v! ) 58;;;; B 8; "8;;;% ) 4;;;; <* c% X ; = d% ) "G; B 8;% "G;;; B 8;;;% ) A; "A;;;% ) 5G;;;; <* E0a#p&e !1 A71, a medium-sized manufacturing firm, is considering the addition of a new machine to its present assembly operation. The machine is e!pected to reduce variable cost by 5:@ per unitP however, it will add G;,;;; <* to total fi!ed cost. Assuming no other change, and given the following current operating data, determine whether or not the new machine should be purchased. 1urrent operating data/ 0i!ed cost 2ariable cost per unit *nit selling price E!pected annual sales So&*tio 4 .ata ummary. 1urrent Cperating .ata "before purchase% 0i!ed 1ost 8;;;;; <* *nit variable cost 8; <* *nit elling price &; <* Estimated annual sales &;;;; *nits <ethod 5 / 7reak-Even Analysis a% +rior to ac'uisition / Anticipated Cperating .ata "after purchase% 8G;;;; <* 59 <* &; <* &;;;; units 8;;,;;; <* 8; <* &; <* &;,;;; units

X; =

8;;;;; = 8;;;; units &; 8;

b% After ac'uisition/

X; =

8G;;;; = 8;;;; units "0or proHected operations% &; 59

558 7reak-even analysis suggests that A71 should be indifferent with regard to the purchase of the additional e'uipment. The decrease in variable cost per unit is e!actly offset at the level by the increase in fi!ed cost. o the firm does not appear to benefit from the ac'uisition. <ethod 8 / 1ost-+rofit Analysis a% +rior to ac'uisition Total $evenue / &; "&;;;;% ) 3;;;;; <* Total 1ost / 8;;;;; = 8; "&;;;;% ) 4;;;;; <* +rofit / 3;;;;; B 4;;;;; ) 5;;;;; <* or ) [ ales "units% B 7E+ "units% ] [ p B v ] ) "&;;;; B 8;;;;% "&; B 8;% ) 5;;;;; <* b% After ac'uisition Total $evenue / &; "&;;;;% ) 3;;;;; <* Total 1ost / 8G;;;; = 59 "&;;;;% ) 99;;;; <* +rofit / 3;;;;; B 99;;;; ) 5&;;;; <* or ) [ ales "units% B 7E+ "units% ] [ p B v ] ) "&;;;; B 8;;;;% "&; B 59% ) 5&;;;; <* -f the new e'uipment is purchased, A71 will receive a profit of 5&;;;; <*. Brea%&Even 'nalysis alone may no be sufficient to solve a (EC)S)*+ problem, )f Sales -evels are %no.n or can be estimated .it a satisfactory degree of accuracy/ t ese s ould be incorporated into t e analysis, ! e 0oint utili1ation of BE and C&2 calculations is one .ay of extracting meaningful information for (ecision Ma%ing, E0a#p&e !! Azim -ndustries is considering a revision of its current advertising program. The current program re'uires a fi!ed investment of 5:,;;; <*. The proposed program will re'uire a fi!ed investment of 8:,;;; <*. AzimKs products currently retail at 58: <*/unit and cost 5;; <*/unit. a% *sing the data at hand, what effect would the revised program have on AzimKs break-even volumeE b% -f the ma!imum output for the Azim is 5,:;; units, should the revised program be undertakenE Dhy or why notE So&*tio 4 .ata ummary. 1urrent +rogram 0i!ed 1ost 5:;;; <* elling price / unit 58: <* 1ost / unit 5;; <* a%. i. 7reak-even using the current program $evised +rogram 8:;;; <* 58: <* 5;; <*

55&

X ;5 = X ;8 =

ii 7reak-even using the revised program

5:;;; = G;; units 58: 5;;

The revised program has a break-even point of 5;;; units b% ince AzimKs output is fi!ed at 5:;; units, a decision on implementing the revised program can be made on the basis of optimum profit. 1urrent +rogram $evised program ales "units% 5:;; 5:;; Total $evenue 549:;; <* 549:;; <* 1ost of 6oods 5:;;;; <* 5:;;;; <* 6ross <argin &9:;; <* &9:;; <* Total variable costs ; ; Total contribution &9:;; <* &9:;; <* Total fi!ed cost 5:;;; <* 8:;;; <* +rofit 88:;; <* 58:;; <* or "current% ) "5:;; B G;;% "58: B 5;;% ) 3;; "8:% ) 88:;; <* "revised% ) "5:;; B 5;;;% "58: B 5;;% ) :;; "8:% ) 58:;; <* Cn the basis of profit, the revised program should not be undertaken. ince there are no adHustments in the selling price per unit or unit costs, the revised program will simply decrease AzimKs profit by the amount of the cost increase. IMPORTANT=

8:;;; = 5;;; units 58: 5;;

Under linear analysis/ t e best decision .it a fixed level of output is simply 3Select t e program t at as t e lo.est BE volume4, ___________________________________________________________________________

E0a#p&e !5 $efinery operations at Altinoglu tation, a single-proprietor operation, necessitate the leasing of certain e'uipment at the rate of &:; <*/month. Altimoglu has three employees whose total wages are 5,G:; <*/month. *tilities cost Altinoglu a total of 8:; <*/month. The contribution margin is ;.8; <*/gallon. Dhat is the break-even point for AltinogluE

So&*tio 4

55A

.ata ummary / 1ost of *tilities Employee wage ?ease rate

) 8:; <* / month ) 5G:; <* / month ) &:; <*/ month 88:; <* / month 1ontribution margin ;.8; <* / 6allon

BE2 = X ; =

F 88:; = = 558:; gallons p v ;.8;

Altinoglu will break even at a volume of 558:; gallons of gasoline. E0a#p&e !6 Azim 1onsultants is operating on an annual volume of 9:;,;;; <* revenue from services. Total variable cost for Azim is 8:;,;;; <*. -f Azim has a total fi!ed cost of 8;;,;;; <*, at what volume revenue does it break evenE So&*tio 4 .ata ummary / Total variable cost / year Total fi!ed cost Total revenue ) 8:;;;; <* ) 8;;;;; <* ) 9:;;;; <*

Fixed Cost F 8;;;;; 8;;;;; BE"MU % = X ; "MU % = = = = = &;;;;; MU !otal variable cost vx 8:;;;; 5 5 5 5 5 !otal annual sales px 9:;;;; &
Azim 1onsultants will break even with an annual volume of &;;;;; <*. E0a#p&e !7 6enel aglik Fospital currently purchases a certain type of surgical supply at a cost of 5: <*/unit. Dhen the surgical units are re'uired, Fospital charges 8: <*/unit. A local medical supplier has offered to provide the surgical supply a cost of 5; <*/unit if Fospital will guarantee a minimum annual purchase of A,;;; units. -n considering the offer, the directors of aglik Fospital have determined that acceptance will re'uire a &;@ increase in fi!ed costP however the patient charge could be reduced 8;@ on a per unit basis. At the present time, aglik uses 8,:;; units each year, but it has been said that the hospital will increase its use rate by A;@ in the coming year. -n addtion aglik current policy re'uires a fi!ed investment of &;,;;; <* in its supply program. Acceptance of this offer will increase this fi!ed investment to :;,;;; <*.

55: hould the offer be accepted or reHectedE DhyE

So&*tio 4 .ata ummary. 1urrent +olicy 0i!ed 1ost &;;;; <* +rice / unit - service 8: <* 1ost / unit - service 5: <* Annual purchase &:;; units <ethod 5 7reak even Analysis a% 1urrent +olicy $evised +olicy &3;;; <* 8; <* 5; <* A;;; units

X ;C =

&;;;; = &;;; units 8: 5:

) "use rate B 7E+% "p B v% ) "&:;; B &;;;% "8: B 5:% ) :;;; <* b% $evised +olicy

X ;R =

) "use rate B 7E+% "p B v% ) "A;;; B &3;;% "8; B 5;% ) 5;;; <* *nder its current purchase policy, hospital can e!pect to break even when it uses &;;; units of surgical material. -ts e!pected usage is &:;; units, a situation which will result in an e!pected profit of :;;; <*. *nder the revised purchase policy, hospital e!pected break-even point is &3;; units. This leads the hospital to 5;;; <* profit. Fospital should not accept supplierKs offer. The current purchase policy is more economical.

&3;;; = &3;; units 8; 5;