The document discusses break even analysis and how to calculate break even points. It provides examples of how to calculate the sales price required for a company to break even given fixed costs and variable costs. It also discusses how to calculate sales volumes required to meet target profit levels accounting for fixed costs, variable costs, and desired profit amounts. The key steps are to calculate the contribution per unit, total contribution required to cover fixed costs and desired profits, and then determining the sales volume or price needed to meet the contribution requirement.
The document discusses break even analysis and how to calculate break even points. It provides examples of how to calculate the sales price required for a company to break even given fixed costs and variable costs. It also discusses how to calculate sales volumes required to meet target profit levels accounting for fixed costs, variable costs, and desired profit amounts. The key steps are to calculate the contribution per unit, total contribution required to cover fixed costs and desired profits, and then determining the sales volume or price needed to meet the contribution requirement.
The document discusses break even analysis and how to calculate break even points. It provides examples of how to calculate the sales price required for a company to break even given fixed costs and variable costs. It also discusses how to calculate sales volumes required to meet target profit levels accounting for fixed costs, variable costs, and desired profit amounts. The key steps are to calculate the contribution per unit, total contribution required to cover fixed costs and desired profits, and then determining the sales volume or price needed to meet the contribution requirement.
At the breakeven point, there is no profit or loss and so
sales revenue – variable cost = total costs or total contribution = fixed costs. At the breakeven point, sales revenue equals total costs and there is no profit. S = V + F where S = Sales revenue V = Total variable costs F = Total fixed costs Subtracting V from each side of the equation, we get: S - V = F, that is, total contribution = fixed costs breakeven arithmetic
Butterfingers Company makes a product
which has a variable cost of $7 per unit. Required If fixed costs are $63,000 per annum, calculate the selling price per unit if the company wishes to break even with a sales volume of 12,000 units. Contribution required to break even (=Fixed costs) = $63,000
Volume of sales = 12,000 units
Required contribution per unit (S – V) = $63,000 – 12,000 5.25
Variable cost per unit (V) = 7.00
Required sales price per unit (S) 12.25
Target profits
The target profit is achieved when sales revenue equals
variable costs plus fixed costs plus profit. Therefore the total contribution required for a target profit = fixed costs + required profit. The target profit is achieved when: S = V + F + P, Where S = Sales revenue V = Variable costs F = Fixed costs P = required profit Subtracting V from each side of the equation, we get: S - V = F + P, so Total contribution required = F + P Example: target profits
RB Co makes and sells a single product, for
which variable costs are as follows. Direct materials $10 Direct labour $8 Variable production overhead $6 $24 The sales price is $30 per unit, and fixed costs per annum are $68,000. The company wishes to make a profit of $16,000 per annum. Required Determine the sales required to achieve this profit. Solution Required contribution = fixed costs + profit = $68,000 + $16,000 = $84,000 Required sales can be calculated in one of two ways. Required contribution/contribution per unit =$84,000/$(30-24) = 14,000 units, or $420,000 in revenue. Required contribution/(C/S) ratio = $84,000/20% = $420,000 of revenue, or 14,000 units. C/S ratio = ($30-$24)/$30 = $6/$30 = 0.2 = 20% Variations on breakeven and profit target calculations
• You may come across variations on breakeven
and profit target calculations in which you will be expected to consider • the effect of altering the selling price, variable cost per unit or fixed cost. Example: change in selling price Stomer Cakes Co bake and sell a single type of cake. The variable cost of production is 15c and the current sales price is 25c. Fixed costs are $2,600 per month, and the annual profit for the company at current sales volume is $36,000. The volume of sales demand is constant throughout the year. The sales manager, Ian Digestion, wishes to raise the sales price to 29c per cake, but considers that a price rise will result in some loss of sales. Required
Ascertain the minimum volume of sales
required each month to raise the price to 29c. Solution
The minimum volume of demand which would
justify a price of 29c is one which would leave total profit at least the same as before, ie $3,000 per month. Required profit should be converted into required contribution, as follows. Monthly fixed costs $2,600 Monthly profit, minimun required $3,000 Currently monthly contribution $5,600 Contribution per unit (25c- 15c) = 10c Current monthly sales = 56,000 cakes The minimum volume of sales required after the price rise will be an amount which earns a contribution of $5,600 per month, no worse than at the moment. The contribution per cake at a sales price of 29c would be 14c. Required sales= required contribution/contribution per unit = $5,600/14c = 40,000 cakes per moth.