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Unformatted text preview: he profit equation to PART answer Jamaal’s questions about volumes needed to break even or achieve a target profit by developing the formulas discussed here. We start with the answer to the first question, which we call finding a break-even volume. Managers might want to know the break-even volume expressed either in units or in sales dollars. If the company makes many products, it is often much easier to think of volume in terms of sales dollars; if we are dealing with only one product, it’s easier to work with units as the measure of volume. break-even point Volume level at which profits equal zero. Orientation Break-Even Volume in Units We can use the profit equation to find the break-even point expressed in units: Profit 0 (P V )X F F _______ (P V ) Preparing and Organizing Yourself Fixed costs for _____________________ Break-even volume (in units) Success in College Unit contribution margin If Profit 0, then X $1,500 $ .24 6,250 prints To show this is correct, if U-Develop processes 6,250 prints, its operating profit is Profit TR TC PX VX ($.60 F 6,250 prints) ($.36 CHAPTERS $0 contribution margin ratio Contribution margin as a percentage of sales revenue. 6,250 prints) $1,500 IN PART ONE Break-Even Volume in Sales Dollars 1 To Makingbreak-evenSuccessfulterms of sales find the Yourself volume in in College dollars, we first define a new term, contribution margin ratio. The contribution margin ratio is the contribution margin as a percentage of sales revenue. For example, for 2 Approaching as follows: U-Develop, the contribution margin ratio can be computed College Reading and Developing a College-Level Vocabulary Unit contribution margin Contribution margin ratio 3 _____________________ Sales price per unit Approaching College Assignments: $.24 ____ Reading Textbooks and Following Directions $.60 .40 (or 40%) Using the contribution margin ratio, the formula to find the break-even volume follows:2 Break-even volume sales dollars 2 Fixed costs _____________________ Contribution margin ratio We can derive the break-even point for sales dollars from the original formula for units: F X ______ PV The modified formula for dollars multiplies both sides of the equation by P: FP PX ______ PV Since multiplying the numerator by P is the same as dividing the denominator by P, we obtain: F PX _________ (P V ) P V)/P is the contribution margin ratio. cor50782_ch01_001-072.indd The term (P 1 lan27114_ch03_080-109.indd 84 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. 1 10/5/09 11:09:29 PM 10/22/09 10:33:53 PM REVISED PAGES Chapter 3 Fundamentals of Cost-Volume-Profit Analysis For U-Develop, the break-even volume expressed in sales dollars is PART Break-even sales dollars $1,500 ______ .40 $3,750 1 85 Note that $3,750 of sales dollars translates into 6,250 prints at a price of $.60 each. We get the same result whether expressed in units (6,250 prints) or dollars (sales o...
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