: selling price per unit less variable cost per unit: ◦ Contribution margin per unit = $80 selling price minus $45 variable cost per unit = $35 4. Calculate your breakeven point in units 11 : fixed costs ÷ contribution margin per unit: ◦ Breakeven in units = $300,000 fixed costs ÷ $35 contribution margin per unit = 8,571 units 7. Method of determining the level of sales at which the company will break even (have no profit or loss). 8. Costs that don’t change when the amount of goods sold changes. 9. Costs that vary, in total, as the quantity of goods sold changes but stay constant on a per-unit basis. 10. Excess of revenue per unit over variable cost per unit. 11. Number of sales units at which net income is zero. Chapter 10 Product Design and Development 550
Your calculation means that if you sell 8,571 pairs of shoes, you will end up with zero profit (or loss) and will exactly break even. If your sales estimate is realistic (a big “if”), then you should be optimistic about starting the business. All your fixed costs will be covered once you sell 8,571 pairs of shoes. Any sales above that level will be pure profit. So, if you sell your expected level of twelve thousand pairs of shoes, you’ll make a profit of $120,015 for the first year. Here’s how we calculated that profit: • 12,000 expected sales level – 8,571 breakeven sales level = 3,429 units × $35 contribution margin per unit = $120,015 first-year profit As you can see, breakeven analysis is pretty handy. It allows you to determine the level of sales that you must reach to avoid losing money and the profit you’ll make if you reach a higher sales goal. Such information will help you plan for your business. KEY TAKEAWAYS • Breakeven analysis is a method of determining the level of sales at which the company will break even (have no profit or loss). • The following information is used in calculating the breakeven point: fixed costs, variable costs, and contribution margin per unit. • Fixed costs are costs that don’t change when the amount of goods sold changes. For example, rent is a fixed cost. • Variable costs are costs that vary, in total, as the quantity of goods sold changes but stay constant on a per-unit basis. For example, sales commissions paid based on unit sales are a variable cost. • Contribution margin per unit is the excess revenue per unit over the variable cost per unit. • The breakeven point in units is calculated with this formula: fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit). Chapter 10 Product Design and Development 10.6 Breakeven Analysis 551
EXERCISE (AACSB) Analysis For the past ten years, you’ve worked at a PETCO Salon as a dog groomer. You’re thinking of starting your own dog grooming business. You found a place you could rent that’s right next to a popular shopping center, and two of your friends (who are also dog groomers) have agreed to work for you.
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- Fall '16