At the breakeven point, a company's sales revenue equals its expenses and there is zero profit. Breakeven
Question:
At the breakeven point, a company's sales revenue equals its expenses and there is zero profit. Breakeven analysis can be expanded to encompass the analysis of costs, volume and profit, so that a company can use it to determine not only the point of zero profit but also the volume needed to earn a particular profit. Companies that understand the relationships among costs, volume and profit can more easily determine what actions to take to increase profit.
At breakeven, total costs equal total revenue. Costs are broken down into fixed and variable costs. This is because variable costs vary with quantity while fixed costs remain the same. So a change in volume affects total variable costs but does not affect fixed costs.
All breakeven equations stem from the basic equation for profit:
Operating income | = Total sales revenue - Total variable costs - Total fixed costs |
= (Price × Quantity) - (Unit variable cost × Quantity) - Total fixed costs |
At breakeven, operating income is zero, so the breakeven quantity sold is calculated as:
Breakeven quantity = Total fixed cost/(Price - Unit variable cost) |
Note that the denominator of the breakeven equation is the unit contribution margin. So, the equation can be rewritten as:
Breakeven quantity = Total fixed cost/Unit contribution margin |
Example: Kalman Company makes vases. Last year, Kalman sold 4,000 vases at a price of $11.00 and had the following information on costs:
Unit direct materials | $1.54 |
Unit direct labor | 0.55 |
Unit variable overhead | 0.33 |
Unit selling expense | 0.66 |
Total fixed overhead | $8,960 |
Total fixed selling and administrative expense | $16,720 |
Unit variable cost is - Select your answer -
$2.42
$4.66
$3.08
$5.32
Item 1. The unit contribution margin is -
Select your answer -
$3.08
$4.95
$6.34
$7.92
$8.58
$11
Item 2. Total fixed cost is -
Select your answer -
$8,960
$16,720
$25,680
Item 3.
Note that all variable costs are added into the unit variable costs. Similarly all fixed costs - whether for production (fixed overhead) or selling and administrative expense are included in total fixed costs.
Breakeven quantity = $25,680/($11.00 - $3.08) = 3,242 units |
We can show that selling 3,242 units does result in breaking even by constructing an income statement.
Sales ($11.00 × 3,242) | $35,662 |
Total variable cost ($3.08 ×3,242) | 9,985 |
Contribution margin | $25,677 |
Total fixed cost | 25,680 |
Operating income | $0 |
Breakeven sales revenue is found by multiplying the breakeven quantity by price. Alternatively, one can multiply both sides of the breakeven equation by price so that the equation for breakeven sales revenue is:
Breakeven sales = Total fixed cost/Contribution margin ratio |
The contribution margin ratio can be computed by (Select "Yes" for the statements that are applicable and "No" for the items that do not apply):
Price - unit variable cost | - Select your answer -YesNoItem 4 |
Unit contribution margin/Price | - Select your answer -YesNoItem 5 |
Total contribution margin/Price | - Select your answer -YesNoItem 6 |
Total contribution margin/Sales | - Select your answer -YesNoItem 7 |
(Price - unit variable cost)/Price | - Select your answer -YesNoItem 8 |
(Price - unit variable cost)/Sales | - Select your answer -YesNoItem 9 |
Price/(Price - unit variable cost) | - Select your answer -YesNoItem 10 |
(1 - variable cost ratio)/Price | - Select your answer -YesNoItem 11 |
Price/Unit contribution margin | - Select your answer -YesNoItem 12 |
(1 - variable cost ratio) | - Select your answer -YesNoItem 13 |
Example: Kalman Company makes vases. Last year, Kalman sold 4,000 vases at a price of $11.00 and had unit variable cost of $3.08. Total fixed costs were $25,680. The contribution margin ratio was - Select your answer -0.280.450.720.78
Item 14 . Breakeven sales were - Select your answer -$12,600$31,980$35,667
Item 15 .Suppose Kalman Company had a contribution margin ratio of 38%, the breakeven sales dollars would be - Select your answer -higher than lower than equal to
Item 16 the original scenario.
Breakeven sales dollars = Total fixed cost/contribution margin ratio = $25,680/0.38= $67,579 |
Now suppose Kalman Company had a contribution margin ratio of 78%, the breakeven sales dollars would be - Select your answer -higher than lower than equal to
Item 17 the original scenario.
Breakeven sales dollars = Total fixed cost/contribution margin ratio = $25,680/0.78 = $32,923 |
Discovering Advanced Algebra An Investigative Approach
ISBN: 978-1559539845
1st edition
Authors: Jerald Murdock, Ellen Kamischke, Eric Kamischke