1. ALSARHANI YAHYA1 Analysis of the relationship between the size, cost and profit CH(3)

2. ALSARHANI YAHYA 2 There are three cases of the results of the business: 1. Revenues> Costs = Profit. 2. Revenues< Costs = Loss. 3. Revenues= Costs = break Even Point.

3. ALSARHANI YAHYA 3 Break Even Point: It is the point when the all revenue = all cost (Revenue – Cost = 0) For Identify the break even point they are three method: 1. Equation Method. 2. Contribution Margin Method. 3. Graphic Method.

4. ALSARHANI YAHYA 4 Equation Method All Revenue = All Cost R = C (N. unit product x P. one unit) = V.C + F.C (N x P) = (variable cost for unit x number of the unit product)+ F.C (N XP) = F.C+ (V.C for unit x N) N. unit product: Number of the unit product P. one unit :Price for one unit V.C: Variable cost. F.C: Fixed cost.

5. ALSARHANI YAHYA 5 Example Perjuston Tires company product tires and the company provide this data: Fixed cost = 100,000 V.C for unit = 50 P. =100 Get the break event point?

6. ALSARHANI YAHYA 6 Contribution Margin Method It is the difference between the price sale for the unit and the variable cost. This margin will gradually cover the fixed costs to be covered in full The contribution margin for the unit =price for the unit – variable cost per unit. We can get the Break Even Point by:

7. ALSARHANI YAHYA 7 All Revenue = All Cost R = C (N. unit product x P. one unit) = V.C + F.C (N x P) = (variable cost for unit x number of the unit product)+ F.C (N XP) - (V.C for unit x N) =F.C N (V.C for unit X P)=F.C N=F.C / (P-V.C for unit) So N = F.C / contribution margin for the unit

8. ALSARHANI YAHYA 8 According to last example : Perjuston Tires company product tires and the company provide this data: Fixed cost = 100,000 V.C for unit = 50 P. =100 What is the contribution margin for the unit ?

9. ALSARHANI YAHYA 9 Graphic Method The graph one of the method which help decision- makers to obtain useful information on the change in the volume of activity and the amount of revenue that is determined a break point or profits or avoiding losses expected.

10. ALSARHANI YAHYA 10 Target net income If the administration wants to know what is the amount of sales made a profit (profit target to be achieved Administration) Before answer this question we should know the target net income formula Revenue = Fixed cost + Variable cost + target net income (N. unit product x P. one unit) = V.C + F.C+ T

11. ALSARHANI YAHYA 11 (N x P) = (variable cost for unit x number of the unit product)+ F.C + T So N=F.C+T / (P-V.C for unit) So N = F.C + T / contribution margin for the unit

12. ALSARHANI YAHYA 12 Example ABC company decided to get profit = 50,000 R.o and the blew is the data from company: Fixed cost = 80,000 P= 10 per unit Variable cost per unit = 6. What is the Break Even Point and what is the target net income?

13. ALSARHANI YAHYA 13 Margin of Safety After we are studying Break Even Point to begin making a profit established after a point but if the volume of activity to less than a point meant they were investigating losses and therefore safety margin is a measure of the extent to which could reduce the sales before entering the circle of losses.

14. ALSARHANI YAHYA 14 How to calculate the Margin of Safety? Margin Safety =( the size or amount the sales - (the size or amount the break point sales / =( the size or amount the sales ) x 100

15. ALSARHANI YAHYA 15 Multiple Product and Break Even Analysis In the first of this chapter we bring break event for one item, but actually most of the company product many items, so to get the break even for many product we should follow the blew steps: 1. Calculate the average of sales price for the mixed product :

16. ALSARHANI YAHYA 16 The average of sales price = (the price for item A x the A percent from all items) + (the price for item B x the B percent from all items) + …. 2. Calculate the average of V.C per unit for all items: (V.C for item A x the A percent from all items) + (V.C for item B x the B percent from all items) + ….

17. ALSARHANI YAHYA 17 3. Calculate the Margin of profit for all items: The average of margin of profit =( the average of sales price for the mixed product - the average of V.C per unit for all items). 4. Calculate the Break even for all items = F.C/ average of margin of profit.

18. ALSARHANI YAHYA 18 Example ABC company are producing 3 items : Orange juice,Limon juice and Mango juice and in the blew the other data belong to this company: ProductPrice per item V.C per unit The percentage for all items Orange8150% Limon6230% Mango114.520%

19. ALSARHANI YAHYA 19 The fixed cost was 240,0000 for all product. Request: calculated the break even for all product

20. ALSARHANI YAHYA 20 ANSWERS 1. Calculate the average of sales price for the mixed product: ProductPrice per unitThe percentage for all items the average of sales price Orange850%4 Limon630%1.8 Mango1120%2.2 the average of sales price 8

21. ALSARHANI YAHYA 21 2. Calculate the average of V.C per unit for all items: ProductV.C per unitThe percentage for all items the average of V.C per unit for all items Orange150%.5 Limon230%.6 Mango4.520%.9 the average of V.C per unit for all items 2

22. ALSARHANI YAHYA 22 3. Calculate the Margin of profit for all items : =( the average of sales price for the mixed product - the average of V.C per unit for all items). = 8 – 2 =6 4. Calculate the Break even for all items : = F.C/ average of margin of profit =240,000 /6=40,000 unit