Chapter 6: Breakeven and Leverage Analysis
Companies face two kinds of costs
Variable costs are expected to change with Sales; they are constant per unit
Examples include sales commissions, raw materials, hourly wages
Fixed costs are constant, regardless of quantity of production
Examples include rent, salaries, and depreciation
Breakeven Point
The breakeven point is the level of sales where profits = 0
Generally, "profits" are seen to be EBIT, not Net Income
IF…
THEN…
Q
Quantity sold
P
Price per unit
EBIT = Q * (PV)  F
V
Variable cost per unit
F
Fixed costs
THEREFORE…
SO…
To solve for the breakeven point, we set EBIT = 0 and…
Q
P
Q = F / (PV)
(PV) is called the Unit Contribution Margin
V
F
Solving for Q
Breakeven Point in Dollars
400,000 / (169.60)
Q * P
Q = 62,500 Units
= 62,500 * $16
= $1,000,000
Hence the firm must sell $1,000,000 worth of units to break
We can calculate Breakeven Points using an Income Statement too
Other Breakeven Points
We can set EBIT to any amount we desire (not just zero) to get, say, a "Target" EBIT
Then we can calculate how many units or sales are needed to reach our Target EBIT
QTarget
=
F + Target EBIT
P  V
So if our Target EBIT is $800,000, our target Units Sold is…
(From the Spuds and Suds Example)
QTarget
=
187,500
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View Full DocumentSo we need to sell how many more units to reach our target EBIT of $800,000?
QTarget
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 Spring '09
 LYZ
 Financial Accounting, Operating Leverage, Revenue, Sales, Unit Unit Sales Variable Costs

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