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BREAK-EVEN ANALYSIS
Mixed Cost
Variable costs
costs that vary or changes
in proportion to changes
in the level of activity.
Direct materials
Direct labor
Units Produced Direct Materials Total Direct
per unit Material Costs
Break-Even Point
Is the level of operations at which a businesss
total revenues and total costs are exactly equal?
A business will have neither an income nor a loss
from operations.
Break Even Point
Revenues Expenses
Break even formula
At sales level of 9,000 units will result in no gain or loss to the company.
Proof:
Sales: ($25 X 9,000) $225,000
Variable cost: ($15 x 9,000) 135.000
Contribution margin 90,000
Fixed costs 90,000
Operating income -0-
Changes in fixed costs
Example: Suppose that selling price is $25,
variable cost $15 and fixed costs are $90,000.
What is break even point if fixed costs increase
to $100,000?
Example: Suppose that selling price is $45, variable cost $30, and fixed costs are
$60,000. The company wants a desired profit of $45,000. What is break even
point and sales required?
To create $45,000 of profit, must sell 7,000 units or 3,000 more than break even point
Charts
Variable
Fixed costs
Units
Graphical Break even point
Sales
$
Total costs
Profit
0 Units
Graphical Break even point
Sales Mix Consideration
More than one product is
sold at varying selling prices
Products often have different
unit variable costs
Products have different
contribution margin
Sales volume necessary must
a mix of both products
Example :
Cascade Co produces two products X and Y. X
has a selling price of $90 per unit and variable
cost of $70. Y has a selling price of $140 and
variable cost of $95. Fixed costs are $200,000.
Xs sales are approximately 80% of total sales
for the company. What is the break even point
for the sales mix?
Example :
Product Selling Variable Contribution Sales Sales mix
Price Cost Margin % Contribution
Margin
Sales $25
mix
Example :
BEP = Fixed Costs
Sales mix CM
= $200,000
$25
Of what products:
=$20,250
1,350