Be Final Cma

7/31/2019 Be Final Cma

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Your boss asks

How many of these things do

we have to sell beforewe start making money?


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then your boss asks

If we sell 100,000 units,what will our profit be?


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Finally, your boss asks

How much do we make

on one of these?


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Are you

going to have

the answers?


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Surprisingly, it is prettyeasy to answer these questions...

If you know how.


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In fact, those who become good at this

can answer these questionsin their heads.

Here is how it is done


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Here is the formula you can use to solve

every break-even problem.SP

-VC

CM-FCNI


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Here is what SP means:

SP = Selling Price-VCCM

-FCNI

Selling Price is usually stated on a per unit basis.For example, A football might sell for $25.00, acar might sell for $25,000, and a 50 yacht mightsell for $250,000.


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VC means:

SP-VC = Variable Cost

CM-FCNI

There will be a more detailed discussion onvariable cost, but for now variable costs

are costs such as labor to build orassemble the product and the materialsused in the product. They are costs thatincrease or decrease in proportion to how

many product units are made or sold.


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CM means: SP-VC

CM = Contribution Margin-FCNI

Selling price less the cost to make orbuy the product equals thecontribution margin. For example,

suppose a company sells a football for$25.00 and it costs the company$15.00 to make the football. The

contribution margin would be $10.00.


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FC means:

SP-VCCM

-FC = Fixed Costs

NI

Fixed costs are those costs that stay thesame regardless of how many products aresold or made (within a reasonable range ofsales or production). Some examples mayinclude property taxes, administrators

salaries, and insurance.


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FC means:

SP-VC

CM-FCNI = Net Income

Net income is simply the contributionmargin minus fixed costs. The break-evenpoint is when net income equals zero.


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The Break-Even Point

The break-even point is the point in thevolume of activity where the organizations

revenues and expenses are equal.

Sales 250,000$

Less: variable expenses 150,000

Contribution margin 100,000Less: fixed expenses 100,000

Net income -$

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Equation Approach

Sales revenue Variable expenses Fixed expenses = Profit

Unitsalesprice

Salesvolumein units

Unit

variableexpense

Salesvolumein units

($500 X) ($300 X)

$80,000 = $0

($200X) $80,000 = $0

X = 400 surf boards 7-15


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Contribution-Margin Approach

For each surf board sold,generates$200 in contribution margin.

Total Per Unit Percent

Sales (500 surf boards) 250,000$ 500$ 100%

Less: variable expenses 150,000 300 60%

Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000

Net income 20,000$

Consider the following informationdeveloped by the accountant at FAROOQFIRM.:

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Fixed expensesUnit contribution margin

=Break-even point

(in units)


Sales (500 surf boards) 250,000$ 500$ 100%


Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000

Net income 20,000$

$80,000

$200

= 400 surf boards

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Here is the proof!

Total Per Unit PercentSales (400 surf boards) 200,000$ 500$ 100%



Less: fixed expenses 80,000Net income -$

400 $500 = $200,000400 $300 = $120,000 7-18


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Contribution Margin Ratio

Calculate the break-even point in sales dollarsrather than units by using the contribution margin

ratio.

Contribution marginSales

= CM

RatioFixed expense

CM RatioBreak-even point(in sales dollars)

=

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Sales (400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%


Less: fixed expenses 80,000

Net income -$

Contribution Margin Ratio

$80,000

40%

$200,000 sales=7-20


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Graphing Cost-Volume-ProfitRelationships

Viewing CVP relationships in a graph givesmanagers a perspective that can be obtained inno other way.

Consider the following information for FAROOQ:

300 units 400 units 500 units

Sales 150,000$ 200,000$ 250,000$

Less: variable expenses 90,000 120,000 150,000Contribution margin 60,000$ 80,000$ 100,000$

Less: fixed expenses 80,000 80,000 80,000

Net income (loss) (20,000)$ -$ 20,000$

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Cost-Volume-Profit Graph

Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

Break-evenpoint

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Profit-Volume GraphSome managers like the profit-volume

graph because it focuses on profits and volume.

100 200 300 400 500 600 700Units

Profit

0

100,000

(20,000)

(40,000)

(60,000)

80,000

60,000

40,000

20,000

Break-evenpoint

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Target Net Profit

We can determine the number of surfboardsthat FAROOQ must sell to earn a profit of$100,000 using the contribution margin

approach.

Fixed expenses + Target profitUnit contribution margin

=Units sold to earnthe target profit

$80,000 + $100,000$200

= 900 surf boards

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Equation Approach

Sales revenue Variable expenses Fixed expenses = Profit

($500 X) ($300 X) $80,000 = $100,000

($200X) = $180,000

X = 900 surf boards

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THANK YOU FOR YOUR


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THANK YOU FOR YOURPATIANCE

We madeit!

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Be Final Cma