Lesson 15-2 Determining Breakeven 2/15/2018 LESSON 15-2 Determining Breakeven RED

CALCULATING THE BREAKEVEN POINT Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT If a manager is to make decisions that yield a favorable net income for a company, the manager needs two important types of information: The amount of merchandise or services the company must sell to earn a favorable net income The factors that contribute most to net income The amount of sales at which net sales is equal to total costs is called the breakeven point LESSON 15-2 RED

CALCULATING THE BREAKEVEN POINT Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT At the breakeven point, neither a net income nor a net loss occurs The breakeven point can be stated in sales dollars or unit sales Information required to calculate a breakeven point are obtained from an income statement prepared to report contribution margin LESSON 15-2 RED

CALCULATING THE BREAKEVEN POINT Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT page 451 Calculate the contribution margin rate by dividing the total contribution margin by net sales Amounts are taken from historical financial statements Net Sales Contribution Margin Contribution Margin Rate ÷ = $27,000.00 .15 or 15% $180,000.00 Analysis of Figures: For every $1.00 of revenue, $.15 is contribution margin. Contribution rate is available to pay for fixed costs & provide net income Variable costs change in direct proportion to changes in sales activity. Therefore, for every $1.00 of revenue, $.85 is required for variable costs LESSON 15-2 RED

CALCULATING THE BREAKEVEN POINT Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT page 451 Calculate the sales dollar breakeven point by dividing total fixed costs by the contribution margin rate. The sales dollar breakeven point is the amount of sales at which the entire contribution margin is used to pay for fixed costs. Contribution Margin Rate Total Fixed Costs Sales Dollar Breakeven Point ÷ = $21,000.00 $140,000.00 .15 or 15% Analysis of Figures: Must have total sales of $140,000 just to recover the fixed costs of doing business More than $140,000 in sales must be made if the company is to earn a net income Sales level less than $140,000 results in a net loss At a sales level of exactly $140,000, total costs are $140,000 (fixed costs are $21,000 and variable costs are $119,000 [$140,000 x .85]) LESSON 15-2 RED

CALCULATING THE BREAKEVEN POINT Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT page 451 Calculate the unit sales breakeven point by dividing the sales dollar breakeven point by the unit sales price Unit Sales Price Sales Dollar Breakeven Point Unit Sales Breakeven Point ÷ = $140,000.00 28,000 units $5.00 Analysis of Figures: The unit sales breakeven point (28,000 units) indicates the number of units the company must sell at $5.00 each to achieve breakeven sales LESSON 15-2 RED

CALCULATING THE BREAKEVEN POINT FOR NEW PRODUCTS Lesson 15-2 2/15/2018 CALCULATING THE BREAKEVEN POINT FOR NEW PRODUCTS When a business plans to introduce a new product, management is interested in knowing how many units the company must sell to break even Since no financial statements exist for a new product an alternative method using the contribution margin per unit is used instead of the contribution margin rate This alternative method is also useful for calculating the breakeven point for existing products when complete financial statements are not available. LESSON 15-2 RED

CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS Lesson 15-2 2/15/2018 CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS page 452 Calculate the contribution margin per unit by subtracting the variable cost per unit from the unit sales price. Variable Cost per Unit Unit Sales Price Contribution Margin per Unit – = $18.00 $6.00 $12.00 The contribution margin per unit represents the amount available per unit to cover fixed costs & earn a profit LESSON 15-2 RED

CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS Lesson 15-2 2/15/2018 CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS page 452 Calculate the unit sales breakeven point by dividing the total fixed costs by the contribution margin per unit. Contribution Margin per Unit Total Fixed Costs Unit Sales Breakeven Point ÷ = $9,000.00 1,500 units $6.00 The unit sales breakeven point indicates the number of units that must be sold at the projected unit sales price to cover all variable & fixed costs If the company sells exactly 1,500 units, it will earn no net income, nor will it incur a net loss LESSON 15-2 RED

CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS Lesson 15-2 2/15/2018 CALCULATING BREAKEVEN POINT FOR NEW PRODUCTS page 452 Calculate the sales dollar breakeven point by multiplying the unit sales breakeven point by the unit sales price Unit Sales Price Unit Sales Breakeven Point Sales Dollar Breakeven Point × = 1,500 $27,000.00 $18.00 Calculation gives the revenue earned by selling 1,500 units at the projected sales price, $18 per unit LESSON 15-2 RED

BREAKEVEN INCOME STATEMENT Lesson 15-2 2/15/2018 BREAKEVEN INCOME STATEMENT page 453 The breakeven income statement is proof for the company’s breakeven point for sales. If the breakeven point is accurate, net income is zero. LESSON 15-2 RED

TERM REVIEW breakeven point page 426 LESSON 15-2 Lesson 15-2 2/15/2018 RED