Copy of Chapter 6- Breakeven and Leverage Analysis

# Copy of Chapter 6- Breakeven and Leverage Analysis -...

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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 * (P-V) - 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 / (P-V) (P-V) is called the Unit Contribution Margin V F Solving for Q Breakeven Point in Dollars 400,000 / (16-9.60) 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 Q-Target = F + Target EBIT P - V So if our Target EBIT is \$800,000, our target Units Sold is… (From the Spuds and Suds Example) Q-Target = 187,500

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So we need to sell how many more units to reach our target EBIT of \$800,000? Q-Target
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Copy of Chapter 6- Breakeven and Leverage Analysis -...

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