Break Even Analysis [Chapter 9]

Objectives Upon completion of this chapter students will be able to: Identify different type of costs. Define type of costs. Contribution Contribution and Variable Rate Understand break-even point Able to solve the chapter’s problems.

Type of Costs Two type of costs are incurred to run a business: Fixed Cost – are those costs that has no relation with the sales volume. Examples: –Depreciation costs, Interest expense, Property taxes, and others. Variable Cost – are cost that has linear relation with sales volume. Examples: –Food Costs, Beverage costs, Salaries and so on.

Contribution Contribution or Gross Profit :  Revenue – Variable Cost = Contribution Net Profit =  Contribution (Gross Profit) - Fixed Cost

Profit & Loss Statement Revenue (Sales) Less : Variable Cost Contribution (Gross Profit) Less: Fixed Cost Net Profit Example: Sales of a Company is $100,000 Variable Cost is $70,000 Fixed Cost is $20,000 Find Gross Profit and Net Profit?

Solution Sales$100,000 Variable Cost $70,000 Contribution(GP) $30,000 Fixed Cost $20,000 Net Profit $10,000

Contribution and Variable Rate ( %) Contribution Contribution Rate = ___________ X 100 Sales Variable Cost Variable Rate = ______________ X 100 Sales

Example Sales$100,000 Variable Cost $70,000 Contribution(GP) $30,000 Fixed Cost $20,000 Net Profit $10,000 Variable Rate = 70,000 X 100 = 70% 100,000 Contribution Rate = 30 %

Conclusions Variable % + Contribution % = 100% Variable Rate + Contribution Rate =1 Contribution Rate = 1 – Variable Rate Total Cost = Variable Cost + Fixed Cost Total Sales = Total Cost Called BEP BEP - Break Even Point

Break –Even - Analysis Purpose –To establish the sales level required to cover all costs. Required Tools – We need to have Fixed Costs –We need to have Contribution Rate or % –BEP = Fixed Costs (FC) –Contribution Rate (CR)

Fixed Cost=$5,400 Variable Costs=$15,000 Sales = $20,000 Find Sales to break – even? Step 1) Find Variable Cost % (Rate) –VR = VC/ Sales =.75 or 75%  Step 2 ) Find Contribution Rate CR = = 0.25  Step 3) BEP Sales = FC / CR  BEP Sales = 5,400 / 0.25 = 21,600

Please Complete Exercises on Page 97 and 98