Cost Accounting Break Even Analysis

2
BREAK EVEN
ANALYSIS
Prepared by Prof. Dr.
Salah1 Mobarak
The Cost-Volume-Profit (CVP)
Model
2
Model
3
Model
4
The Break-Even Point
Using
Using the
the CVP
CVP Model,
Model, we
we can
can determine
determine the
the
breakeven
breakeven point
point for
for sales
sales units.
units.
5
Using
Using the
the CVP
CVP Model,
Model, we
we can
can determine
determine the
the
breakeven
breakeven point
point for
for sales
sales units.
units.
Assume breakeven is where Net Income = zero.

Then solve for the desired variable.
6
Contribution-margin Approach
To
To compute
compute breakeven
breakeven units
units
using
using the
thecontribution
contribution approach,
approach,
we
weset
setNI
NI ==00and
and then
then
algebraically
algebraicallymanipulate
manipulate thethe
equation
equationto
tosolve
solve for
forthe
the
breakeven
breakeven units
units (X).
(X).
7
8
9
Example
Bradley,
Bradley, Inc.
Inc. sells
sells briefcases
briefcases for
for $105.00
$105.00 each.
each.
Variable
Variable costs
costs are
are $45.00
$45.00 each
each and
and fixed
fixed cost
cost is
is
$240,000.
$240,000.
Compute
Compute the the breakeven
breakeven sales
sales volume.
volume.
A.2,286
A.2,286 units
units
B4,000
B4,000 units
units
C.5,334
C.5,334 units
units
D.60
D.60 units
units
10
Example
Bradley,
Bradley, Inc.
Inc. sells
sells briefcases
briefcases for
for $105.00
$105.00 each.
each.
Variable
Variable costs
costs are
are $45.00
$45.00 each
each and
and fixed
fixed cost
cost is
is
$240,000.
$240,000.
Compute
breakeven sales
sales volume.
volume.
A.
A. 2,286
2,286 units
units You divided Fixed Cost
B4,000
B4,000 units
units by Sales Price per Unit?
Think about the
C.5,334
C.5,334 units
units formula and try again.
D.60
D.60 units
units
11
Example
Bradley,
Bradley, Inc.
Inc. sells
sells briefcases
briefcases for
for $105.00
$105.00 each.
each.
Variable
Variable costs
costs are
are $45.00
$45.00 each
each and
and fixed
fixed cost
cost is
is
$240,000.
$240,000.
Compute
breakeven sales
sales volume.
volume.
A.2,286
A.2,286 units
units You divided Fixed Cost
B4,000
B4,000 units
units by Variable Price per
Unit? Think about the
C.
C. 5,334
5,334 units
units formula and try again.
D.60
D.60 units
units
12
Example
Bradley,
Bradley, Inc.
Inc. sells
sells briefcases
briefcases for
for $105.00
$105.00 each.
each.
Variable
Variable costs
costs are
are $45.00
$45.00 each
each and
and fixed
fixed cost
cost is
is
$240,000.
$240,000.
Compute
breakeven sales
sales volume.
volume.
A.2,286
A.2,286 units
units The
TheContribution
ContributionMargin
Margin
B4,000
B4,000 units
units is
is$60.
$60. II don’t
don’t know
know
how
how you
youturned
turned that
that
C.5,334
C.5,334 units
units into
into 60
60units!
units! Try
Tryagain.
again.
D.
D. 60 60 units
units
13
Example
Bradley,
Bradley, Inc.
Inc. sells
sells briefcases
briefcases for
for $105.00
$105.00 each.
each.
Variable
Variable costs
costs are
are $45.00
$45.00 each
each and
and fixed
fixed cost
cost is
is
$240,000.
$240,000.
Compute
breakeven sales
sales volume.
volume.
A.2,286
A.2,286 units
units
B
B 4,000
4,000 units
units
C.5,334
C.5,334 units
units
D.60
D.60 units
units
14
Congratulations!
Target Profit
The
The Target
Target Profit
Profit Model
Model is
is
very
very useful
useful in
in planning.
planning.
In
In essence,
essence, itit is
is just
just like
like aa
Breakeven
Breakeven problem
problem
where
where Target
Target Profit
Profit >> $0.
$0.
15
Operating Leverage
Operating Leverage (OL) is the effect that
fixed costs have on changes in operating
income as changes occur in units sold,
expressed as changes in contribution margin
OL = Contribution Margin
Operating Income
Notice these two items are identical, except

for fixed costs
16
The CVP Model and Income
Taxes
Because
Becausecompanies
companies must
must pay
paytaxes
taxeson
on income,
income, Target
Target
Income
Income must
must be
beset
sethigh
highenough
enoughto
tocover
coverthe
thetaxes.
taxes.
Use
Usethe
theBefore-tax
Before-taxTarget
Target
Income
Incomein in your
your Target
Target
Income
IncomeModel
Model
17
Taxes - Example
Soccer
Soccer Co.
Co. sells
sells aa line
line of
of soccer
soccer balls.
balls.
The
The balls
balls sell
sell for
for $12
$12 each.
each. Variable
Variable cost
cost
per
per ball
ball is
is $5.30.
$5.30. Fixed
Fixed costs
costs for
for the
the
company
company total total $360,000.
$360,000.
Soccer
Soccer Co.
Co. must
must achieve
achieve anan after-tax
after-tax
profit
profit of
of $3
$3 million
million toto meet
meet market
market
expectations.
expectations. The
The company
company is is subject
subject toto
an
an average
average tax
tax rate
rate of
of 30%.
30%.
Compute Before-Tax
Target18Income.
Taxes - Example
19
Taxes - Example
Before-tax
Before-tax Target
Target Income
Income is is $4,285,714.
$4,285,714. Fixed
Fixed
Cost
Cost is
is $360,000.
$360,000. Sales
Sales price
price per
per unit
unit is
is $12
$12 and
and
variable
variable cost
cost per
per unit
unit is
is $5.30.
$5.30. How
How many
many soccer
soccer
balls
balls must
must be
be sold
sold toto meet
meet target
target profit?
profit?
A.53,731
A.53,731 units
units
B.639,659
B.639,659 units
units
C.693,390
C.693,390 units
units
D.357,143
D.357,143 units
units
20
Taxes - Example
Before-tax
Before-tax Target
Target Income
$4,285,714. Fixed
Fixed
Cost
Cost is
is $360,000.
$360,000. Sales
Sales price
price per
per unit
unit is
is $12
$12 and
and
variable
variable cost
cost per
per unit
unit is
is $5.30.
$5.30. How
How many
many sail
sail
boats
boats must
must be
be sold
sold to to meet
meet target
target profit?
profit?
A.
A. 53,731
53,731 units
units You have
B.639,659
B.639,659 units
units computed
C.693,390 Breakeven Units.
C.693,390 units
units
Try again.
D.357,143
D.357,143 units
units
21
Taxes - Example
Before-tax
Before-tax Target
Target Income
$4,285,714. FixedFixed
Cost
Cost is
is $360,000.
$360,000. Sales
Sales price
price per
per unit
unit is
is $12
$12 and
and
variable
variable cost
cost per
per unit
unit is
is $5.30.
$5.30. How
How many
many sailsail
boats
boats must
must be
be sold
sold to to meet
meet target
target profit?
profit?
A.53,731
A.53,731 units
units Good
Good try,
try, but
but you
you
divided
dividedthe
thewrong
wrong
B.
B. 639,659
639,659 units
units number
number byby CM?
CM?TakeTake
C.693,390
C.693,390 units
units another
anotherlook
look at
at the
the
model
model and
andtry
tryagain.
again.
D.357,143
D.357,143 units
units
22
Taxes - Example
Before-tax
Before-tax Target
Target Income
$4,285,714. Fixed
Fixed
Cost
Cost is
is $360,000.
$360,000. Sales
Sales price
price per
per unit
unit is
is $12
$12 and
and
variable
variable cost
cost per
per unit
unit is
is $5.30.
$5.30. How
How many
many sail
sail
boats
boats must
must be
be sold
sold to to meet
meet target
target profit?
profit?
A.53,731
A.53,731 units
units Why
Whydiddidyou
you divide
divide
Target
Target Income
Incomebyby
B.639,659
B.639,659 units
units Sales
SalesPrice?
Price? That
That
C.693,390
C.693,390 units
units isn’t
isn’t in
in the
the model!
model!
Try
Try again.
again.
D.
D. 357,143
357,143 units
units
23
Taxes - Example
Before-tax
Before-tax Target
Target Income
$4,285,714. Fixed
Fixed
Cost
Cost is
is $360,000.
$360,000. Sales
Sales price
price per
per unit
unit is
is $12
$12 and
and
variable
variable cost
cost per
per unit
unit is
is $5.30.
$5.30. How
How many
many soccer
soccer
balls
balls must
must be
be sold
sold toto meet
meet target
target profit?
profit?
A.53,731
A.53,731 units
units
B.639,659
B.639,659 units
units
C.
C. 693,390
693,390 units
units
D.357,143
D.357,143 units
units
24 SCORE!
Target Profit
25
Multiple Products and the Sales
Mix
The
The previous
previousCVP
CVP discussion
discussion assumed
assumed that
that the
the
company
companysold
sold only
only11 product.
product.
In
In most
most situations,
situations,the
thesales
salesmix
mix includes
includes22or
or more
more
products.
products.
? 26
Mix
The
The previous
previousCVP
CVP discussion
discussion assumed
assumed that
that the
the
company
companysold
sold only
only11 product.
product.
In
In most
most situations,
situations,the
thesales
salesmix
mix includes
includes22or
or more
more
products.
products.
IfIf the
thesales
salesmixmixis isnot
not
constant,
constant, or or ifif the
the cost
cost
function
functionis iscurvilinear,
curvilinear, CVP CVP
analysis
analysis is isnot
not reliable.
reliable.
27
Mix
The
The previous
previousCVP
CVP discussion
discussion assumed
assumed that
that the
the
company
companysold
sold only
only11 product.
product.
In
In most
most situations,
situations,the
thesales
salesmix
mix includes
includes22or
or more
more
products.
products.
IfIf the
thesales
salesmixmixis isnot
not When
Whenthe
the sales
salesmix
mixis
is
constant,
constant, or or ifif the
the cost
cost constant,
constant, compute
compute aa
function
functionis iscurvilinear,
curvilinear, CVP CVP weighted
weighted average
averageunit
unitCM
CM
analysis
analysis is isnot
not reliable.
reliable. to
touse
use with
withCVP
CVP analysis.
analysis.
28
Mix - Example
Ayer
Ayer Planes
Planes sells
sells two
two different
different planes,
planes, aa single-
single-
engine
engine and
and aa twin-engine.
twin-engine. Fixed
Fixed costs
costs for
for the
the
company
company total
total $20,000,000.
$20,000,000.
Ayer
Ayer Planes
Planes must
must achieve
achieve anan after-tax
after-tax profit
profit of
of
$6
$6 million.
million. The
The company
company is is subject
subject to
to an
an
average
average tax
tax rate
rate of
of 25%.
25%.
29
Mix - Example
Steps
Steps for
for Multiple
Multiple
Product
Product CVP:
CVP:
Compute
 Compute Before-tax
Before-tax
Target
Target Profit
Profit
Compute
 Compute Weighted
Weighted
Average
Average Unit
Unit CM
CM
Compute
Compute Target
Target
Profit
Profit Volume
Volume
30
Mix - Example
Click here when you think you have the answer.
31
Mix - Example
32
Mix - Example
Click here when you think you

know the answer.
For each product multiply the CM by the portion

of sales accounted for by that product. Then
add the totals together to get a weighted
average unit contribution margin (WAUCM).
33
Mix - Example
34
Mix - Example
Click here when you think you

know the answer.
35
Mix - Example
36
Alternative Income Statement
Formats
End of Chapter 2
37
38

Cost Accounting Break Even Analysis

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Cost Accounting Break Even Analysis

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2

Assume breakeven is where Net Income = zero.

Notice these two items are identical, except

Click here when you think you have the answer.

Click here when you think you

For each product multiply the CM by the portion

Click here when you think you

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