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# S7 42 profit cor r idor loss corridor break even

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S7 - 42 Profit cor r idor Loss corridor Break-Even Analysis Break-Even Analysis Total revenue line Total cost line Variable cost Fixed cost Break-even point Total cost = Total revenue 900 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – | | | | | | | | | | | | 0 100 200 300 400 500 600 700 800 900 10001100 Cost in dollars Volume (units per period) Figure S7.5
S7 - 43 Break-Even Analysis Break-Even Analysis BEP x = break- even point in units BEP \$ = break- even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx TR = TC or Px = F + Vx Break-even point occurs when Break-even point occurs when BEP x = F P - V
S7 - 44 Break-Even Analysis Break-Even Analysis BEP x = break- even point in units BEP \$ = break- even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx BEP \$ = BEP x P = P = = F ( P - V )/ P F P - V F 1 - V / P Profit = TR - TC = Px - ( F + Vx ) = Px - F - Vx = ( P - V ) x - F
S7 - 45 Break-Even Example Break-Even Example Fixed costs = \$10,000 Material = \$.75/unit Direct labor = \$1.50/unit Selling price = \$4.00 per unit BEP \$ = = F 1 - (V/P) \$10,000 1 - [(1.50 + .75)/(4.00)]
S7 - 46 Break-Even Example Break-Even Example Fixed costs = \$10,000 Material = \$.75/unit Direct labor = \$1.50/unit Selling price = \$4.00 per unit BEP \$ = = F 1 - (V/P) \$10,000 1 - [(1.50 + .75)/(4.00)] = = \$22,857.14 \$10,000 .4375 BEP x = = = 5,714 F P - V \$10,000 4.00 - (1.50 + .75)
S7 - 47 Break-Even Example Break-Even Example 50,000 40,000 30,000 20,000 10,000 | | | | | | 0 2,000 4,000 6,000 8,000 10,000 Dollars Units Fixed costs Total costs Revenue Break-even point
S7 - 48 Break-Even Example Break-Even Example BEP \$ = F 1 - x ( W i ) V i P i Multiproduct Case Multiproduct Case where V = variable cost per unit P = price per unit F = fixed costs W = percent each product is of total dollar sales i = each product
S7 - 49 Multiproduct Example Multiproduct Example Annual Forecasted Item Price Cost Sales Units Sandwich \$5.00 \$3.00 9,000 Drink 1.50 .50 9,000 Baked potato 2.00 1.00 7,000 Fixed costs = \$3,000 per month
S7 - 50 Multiproduct Example Multiproduct Example Annual Forecasted Item Price Cost Sales Units Sandwich \$5.00 \$3.00 9,000 Drink 1.50 .50 9,000 Baked potato 2.00 1.00 7,000 Fixed costs = \$3,000 per month Sandwich \$5.00 \$3.00 .60 .40 \$45,000 .621 .248 Drinks 1.50 .50 .33 .67 13,500 .186 .125 Baked 2.00 1.00 .50 .50 14,000 .193 .096 potato \$72,500 1.000 .469 Annual Weighted Selling Variable Forecasted % of Contribution Item ( i ) Price ( P ) Cost ( V ) ( V / P ) 1 - ( V / P ) Sales \$ Sales (col 5 x col 7)
S7 - 51 Multiproduct Example Multiproduct Example Annual Forecasted Item Price Cost Sales Units Sandwich \$5.00 \$3.00 9,000 Drink 1.50 .50 9,000 Baked potato 2.00 1.00 7,000 Fixed costs = \$3,000 per month Sandwich \$5.00 \$3.00 .60 .40 \$45,000 .621 .248 Drinks 1.50 .50 .33 .67 13,500 .186 .125 Baked 2.00 1.00 .50 .50 14,000 .193 .096 potato \$72,500 1.000 .469 Annual Weighted Selling Variable Forecasted % of Contribution Item ( i ) Price ( P ) Cost ( V ) ( V / P ) 1 - ( V / P ) Sales \$ Sales (col 5 x col 7) BEP \$ = F 1 - x ( W i ) V i P i = = \$76,759 \$3,000 x 12 .469 Daily sales = = \$246.02 \$76,759 312 days .621 x \$246.02 \$5.00 = 30.6 31 sandwiches per day
S7 - 52 Reducing Risk with Reducing Risk with Incremental Changes Incremental Changes (a) Leading demand with incremental expansion Demand Expected demand New capacity (c) Attempts to have an average capacity with incremental expansion Demand New capacity Expected demand (b) Capacity lags demand with incremental expansion Demand New capacity Expected demand Figure S7.6

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