Salem Templates

Break Even Analysis

BEQ = FC / CMu*

CM = Revenues – VC

* CMu = Contribution Margin per unit

 Profit – Volume Charts
Margin of Safety Formula = FC
Profit = Budget - BEP CMu

BEP
No activity : Profit
loss of FC
Volume of Activity (Sales)
FC Loss CM
Sales Revenues PQ
Variable Costs VC
Impact
Contribution Margin CM
Loss Fixed Costs FC
Operating Income OI
Relevant Range
 Budgeting: Costs and their Behaviour
Variable Costs
Y Y
Total Unit
Variable Y=5X Variable
Costs € Costs
Constant
(materials) €5 VCu
=5

Output level X Output level X

Y Fixed Costs Y
Total
Fixed Unit
Costs € Fixed
Constant Y = 10 Costs Declining
10 FC
(Depreciation, Interest on Debt, Rent)

Output level X Output level Y

The Higher the Fixed Costs, the Riskier the Firm

 Salem: Q1 &2 Cost Analysis
Variable expenses:
- ................ ………..
- ................ ………..
Total VC (per hour) ..............
Fixed Expenses:
- ..............
- ............
- .............
- .............
- .............
- .............
- .............
- .............
- ..............
- .............
- Total Fixed Costs ..............

Cost Function: Y = a + bX => Y = ............. + ..........X

Discretionary cost is Variable, but once decided it will be Fixed
 Mixed Costs : Y = …….. + …….. X

The total mixed cost line can be expressed

as an equation: Y = a + bX

Where: Y = The total mixed cost.

a = The total fixed cost (the
Y vertical intercept of the line).
b = The variable cost per unit of
Total Utility Cost

ost activity (the slope of the line).

d c X = The level of activity.
m ixe
ta l
To Variable
Cost per rev. hour
X Fixed yearly
Activity (rev. hours)
charges

McGraw-Hill/Irwin Slide 5
 Salem: Cost Funtion

Y TC = ............. + ............ X
Total
Cost
(TC)
VC

.......... VCu
............
Intercept
FC

Relevant range X
of lineair relationship
 Q3 Salem: Contribution Margin Statement
Sales Revenues : Intracompany: .....*.... = ........
Sales Revenues : Commercial : .....*.... = ..........
......
• Total Revenues = .........

• Variable Costs : .........*........ = ..........

• Contribution Margin = ..........

• Fixed Costs = ............

• Operating Income (loss) = ...........

 Q4: Salem: Break-Even Analysis

BEP hrs of Commercial sales

= FC – [Contribution by the Intraco. Sales]

CM per hour

= ............. – [.......... * (.......... – ......)]

(..... - ......) =

= ......... - [..... * (........)]

(...........)

= ...... hrs.

Increase the Commercial Hours from ..... by ..... to ...... to make Break-Even
 Q5: Analyzing Options on Commercial sales
Present CM = ...... * (..... - .....) = ......
Action 1: Increase Price to ......, reduce demand ......
- Demand: .....*......... = ......
- CM = ....... * (.....-.....) = ...... (more/less than Present CM)

Action 2: Reduce Price to ....., increase demand .......

- Demand: ..... * ......... = .......
- CM = ....... * (.... – .....) = ....... (more/less than Present CM)

Action 3: Increase promo, increase demand with 30%

- Demand: ....... * ......... = ......
- CM = ……. * (..... – ....) = ...... (more/less than Present CM)

Promo budget = ...... – ...... = ........

without reducing Income (or Profit)
 Q6: Salem: Conclusion

1. Services (Good services for Headquarter and what about

the Hours they sell? Increasing?)

2. Activities (what to do to make Salem profitable?)

Conclusion: ....... Salem Close/Open?