On a unit basis, the contribution margin for Video Productions is $8 (the selling price of $20 less the variable cost per unit of $12). Thus, the break-even point is the operating level at which a company realizes no net income or loss. A company may express a zero point in dollars of sales revenue or number of units produced or sold.
To illustrate the calculation of a break-even point, recall that Video Productions produces videotapes that sell for $20 per unit. Break-even in units We calculate the break-even point in units by dividing the total fixed costs by the contribution margin per unit. The coverage contribution per unit is $8 ($20 selling price per unit - $12 variable cost per unit).
Look at Exhibit 23 and notice that the revenue and total cost lines cross at 5,000 units—the break-even point. Breakeven in Sales Dollars Companies often think of volume in sales dollars rather than units. The formula for calculating the break-even point in sales dollars is very similar to the formula for calculating break-even in units, except that we divide fixed costs by the coverage ratio instead of the contribution margin per unit. unit.
For example, assume that Video Productions currently has sales of $120,000 and its break-even sales are $100,000.
Cost-volume-profit analysis illustrated
If a company's current sales are greater than its breakeven point, it has a margin of safety equal to current sales minus breakeven sales. Margin of safety is the amount by which sales can decrease before the company incurs a loss. Sometimes people express the margin of safety as a percentage, called the margin of safety degree.
This means that sales volume could fall by 16.67 percent before the company suffered a loss. The fixed costs of Flight 529 are the same regardless of the number of seats filled. Fixed costs include the fuel required to fly the aircraft and crew (without passengers) to its destination; depreciation on the aircraft used in flight; and salaries of required crew members, gate attendants, and maintenance and fuel personnel.
Assume that after analyzing the various costs and dividing them into fixed or variable categories, management finds that the fixed costs for Flight 529 are $12,000 and the variable costs are $25 per passenger. We can express the break-even point either in sales dollars or in the number of passengers. With a simple adjustment in the break-even formulas, CVP analysis can also show the sales volume needed to generate a desired level of net income (ignore taxes).
To make this adjustment, management adds the desired net income amount to the fixed costs that need to be covered. From this, management can determine the required sales volume in dollars or units to generate the desired net income. Management can use a cost-volume-profit analysis to calculate the sales volume needed to maintain net income as costs change.
For example, suppose that both fixed and variable costs for an airline would increase if the price of fuel were to rise. Assume that fixed costs increase by $4,000 and variable costs increase by $6.25 per passenger. As networks find it increasingly difficult to catch their regular shows, they are expanding into cable, satellite and pay TV.
Assumptions made in cost-volume-profit analysis
Many don't even cover their variable costs and are dropped during the first season.
Using computer spreadsheets for CVP analysis
In many business meetings, we find one or more people calling out cost-volume-profit numbers on their laptops or computers.
Effect of automation on cost-volume-profit analysis
If it crosses at low volumes, to the left of point A in Exhibit 25, increasing automation increases the company's break-even point. However, at high volumes, if increasing automation lowers total costs, it lowers the company's break-even point. The break-even point is that level of operations at which a company realizes no income or loss.
Break-even point The level of operations at which the revenues for a period equal the costs allocated to that period so that there is no net income or loss. Margin of safety Margin of safety expressed as a percentage, which corresponds to (Current sales – Break-even sales)/Current sales. Dollar sales are used to calculate the break-even point for a multi-product business.
How can the discount formula be modified to calculate the number of units that must be sold to achieve a desired level of revenue. What effect would you expect the mechanization and automation of production processes to have on the break-even point? Exercise C Calculate the breakeven point in sales dollars if fixed costs are $200,000 and the total contribution margin is 20 percent of revenue.
Exercise E Peter Garcia Meza is considering buying a company if it breaks even or earns net income from revenues of USD 80,000 per month. Calculate the break-even point in both sales dollars and units under each of the following independent assumptions. If it charges USD 25 per child per day, what will be its break-even point, expressed in dollars of 10 per child per day.
If she charges $25 per child per day, what will be the breakeven point in dollars of revenue. Use the preceding chart to label the relevant range, total costs, fixed costs, breakeven point, and profit and loss areas. Problem C Bootleg Company management wants to know the break-even point for its new line of hiking boots under each of the following independent assumptions.
Calculate the break-even point in units and sales dollars for each of the four independent cases. Determine the break-even point in sales dollars for the Niners Corporation based on the data given in (e) and then in (f).
The operating results for two companies follow
Prepare a cost-volume-profit chart for Sierra Company, showing the break-even point, contribution margin, and income and loss areas. If the selling price were raised to $14.40 per unit, at what dollar level of sales would the company earn $144,000. Determine the normal sales point in dollars and units for Cowboys Company that has fixed costs of $63,000, variable costs of $24.50 per unit, and a selling price of $35.00 per unit.
At what would the break-even point in sales dollars be (c) if variable costs had been 10 percent higher. At what would the break-even point in sales dollars be (c) if fixed costs were 10 percent higher. Compute the break-even point in sales dollars for Hoosiers Company in (c) under the assumptions of (d) and (e) together.
Indicate on the chart the relevant range, breakeven point, and areas of net income and losses. The second alternative would not affect fixed costs but would increase variable costs to 60 percent of the selling price of the company's product. Assuming the company's product sells for $60 per unit, what is the company's breakeven point in sales dollars.
At what percentage of capacity must the company operate to break even at the reduced selling price. You go to the company's records and obtain the following information regarding the production of Part J. Business Decision Case D Refer to "A Broader Perspective: Large TV Networks Find It Harder to Break Even" discussion of cost-volume-profit analysis regarding television network.
Write a note to your instructor describing how the networks can reduce their break-even point. Why would a company consider increasing automation and decreasing the use of labor if the result would be an increase in the break-even point. Go to the company's latest financial statements and review the consolidated income statement.
