1. AMIS 310 Foundations of Accounting
Chapter 12 Module 6
CHAPTER 1 MODULE 1
AMIS 310 Foundations of Accounting
Professor Marc Smith

2. Chapter 12 Module 6: Break-Even Point (sales $)
The break-even point (in sales dollars) represents the
amount of sales revenue that must be generated to
‘break-even’
● Variable cost ratio =
Variable costs ÷ Sales Revenue OR
Variable cost per unit ÷ Selling price per unit
NOTE: Since variable costs are a function of activity, they
will always be a constant percentage of sales

3. Chapter 12 Module 6: Example #3
d. Variable cost ratio = ÷ = %
Net income = Sales – Variable costs – Fixed Costs
0 = Sales – (Variable cost ratio x Sales) – Fixed costs
0 = Sales – .792Sales – Fixed costs
0 = Sales – $468,000
.208Sales = $468,000
Sales = $2,250,000

4. Contribution margin ratio
Chapter 12 Module 6: Example #3
Alternative formula to calculate the break-even point in sales dollars:
Amount of revenue =
Total Fixed costs
Contribution margin ratio
$468, ÷ = $2,250,000

5. Chapter 12 Module 6: Example #3
e Target Profit Units
For break-even  0 = ($25 x Units) – ($19.80 x Units) – $468,000
130,000 = ($25 x Units) – ($19.80 x Units) – $468,000
130,000 = ($5.20 x Units) – $468,000
($5.20 x Units) = $598,000
Units = 115,000
Proof
Sales (115,000 $25) $2,875,000
Less: Variable costs 2,277,000
Contribution margin $598,000
Less: Fixed costs ,000
Net income $ 130,000

6. Chapter 12 Module 6: Example #3
f Target Profit Units
XYZ Company wants to know the number of units that must be sold in order to earn a profit equal to percent of sales revenue.
0.08($25)(Units) = ($25 x Units) – ($19.8 x Units) – $468,000
$2 x Units = ($25 x Units) – ($19.8 x Units) – $468,000
$2 x Units = ($5.20 x Units) – $468,000
$3.20 x Units = $468,000
Units = ,250

7. Chapter 12 Module 6: Example #3
Proof
Sales (146,250 $25) $3,656,250
Less: Variable costs 2,895,750
Contribution margin $ 760,500
Less: Fixed costs ,000
Net income $ 292,500
292, ÷ 3,656, = 8%

8. Chapter 12 Module 6: Example #3
g. Income statement before any changes are made
Units sold ,000
Sales (120,000 $25) $3,000,000
Less: Variable costs (120,000 $19.8) 2,376,000
Contribution margin $ 624,000
Less: Fixed costs ,000
Net income $ 156,000

9. Chapter 12 Module 6: Example #3
g. Income statement after the changes are made
Units sold ,000
Sales (160,000 $24) $3,840,000
Less: Variable costs (160,000 $19.8) 3,168,000
Contribution margin $ 672,000
Less: Fixed costs ,000
Net income $ 154,000
Do not make the changes – net income is $2,000 less if the changes are made.