Break Even Analysis-MBA
Transcript of Break Even Analysis-MBA
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Prof.R.Chandrasekhar Ph.D
Variable Costs
Fixed Costs
Common Cost Behavior Patterns
Common Cost Behavior Patterns
Prof.R.Chandrasekhar Ph.D
Variable CostsVariable Costs
Costs that change in proportion to changes in volume or activity
At restaurants, food costs vary with the number of customers served
For airlines, fuel costs vary with the number of miles flown
Example Activity increases by 10% Cost increases by 10%
Prof.R.Chandrasekhar Ph.D
Fixed CostsFixed Costs
Do not change in response to changes in activity level Typical fixed costs are depreciation,
supervisory salaries, and building maintentance
Example Activity increases by 10% Costs remain unchanged
Prof.R.Chandrasekhar Ph.D
Fixed CostsFixed Costs
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Mixed CostsMixed Costs
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Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Equation Abbreviations
x = Quantity of units produced and sold
SP = Selling price per unit VC = Variable cost per unitTFC = Total fixed cost
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
The Profit Equation
Profit = SP(x) – VC(x) – TFC
Fundamental to CVP analysis
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Break-Even Point Number of units sold that allow the
company to neither a profit nor a loss
$0 = SP(x) – VC(x) – TFC
Margin of Safety Difference between expected sales
and break-even sales
Prof.R.Chandrasekhar Ph.D
Break-Even PointBreak-Even Point
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Contribution Margin (CM) Difference between selling price
and variable cost per unit
Profit = (SP – VC)(x) – TFC
OR
Profit = CM per unit(x) - TFC
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Contribution Margin Ratio Contribution of every sales dollar to
covering fixed cost
CM Ratio = SP – VC SP
Profit Equation (utilizing CM Ratio)
Sales($) = Profit + TFC CM Ratio
Prof.R.Chandrasekhar Ph.D
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
“What If” Analysis Utilize profit equation to determine
impact of managerial decisions
Change in Fixed and Variable Costs
Change in Selling Price
Prof.R.Chandrasekhar Ph.D
Gabby’s Wedding Cakes creates elaborate wedding cakes. Each cake sells for $500. The variable cost of baking the cakes is $200 and the fixed cost per month is $6,000
1. Calculate the break-even point for a month.
2. How many cakes must be sold to earn a monthly profit of $9,000?
Prof.R.Chandrasekhar Ph.D
Break-Even Pointx = (Profit + TFC) / CM per Unitx = ($0 + $6,000) / $300x = 20 cakes
What if monthly profit is $9,000?x = ($9,000 + $6,000) / $300x = 50 cakes
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Assumptions in CVP Analysis
Assumptions in CVP Analysis
Costs can be accurately separated into fixed and variable components
Fixed costs remain fixed
Variable costs per unit do not change
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Rhetorix, Inc. produces stereo speakers. The selling price per pair of speakers is $800. The variable cost of production is $300 and the fixed cost per month is $50,000.
1. Calculate the contribution margin associated with a pair of speakers.
2. Calculate the contribution margin ratio for Rhetorix associated with a pair of speakers.
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Contribution MarginCM = SP – VCCM = $800 - $300CM = $500
If the company sells five more speakers than planned, what is the expected effect on profit of selling the additional speakers?Expected Effect = $500 * 5 units = $2,500
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Contribution Margin RatioCM Ratio = (SP – VC)/SP = ($800 - $300)/$800
= 62.5%
If the company has sales that are $5,000 higher than expected, what is the expected effect on profit?Expected Effect = 62.5% * $5,000 = $3,125
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1. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution Margin per unit is?a. $65b. $75c. $175d. $30
Prof.R.Chandrasekhar Ph.D
1. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution margin per unit is?a. $65b. $75c. $175d. $30
Prof.R.Chandrasekhar Ph.D
2. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?
a. 1,000 units
b. 1,083 units
c. 2,000 units
d. None of these
Prof.R.Chandrasekhar Ph.D
2. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?
a. 1,000 units
b. 1,083 units
c. 2,000 units
d. None of these
Prof.R.Chandrasekhar Ph.D
3. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?a. $264,000b. $384,000c. $143,000d. $121,000
Prof.R.Chandrasekhar Ph.D
3. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?a. $264,000b. $384,000c. $143,000d. $121,000
Prof.R.Chandrasekhar Ph.D
4. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?
Answer here: _________________
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4. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?
Answer here: $143,000