1. Chapter 13 Risk Analysis & Project Evaluation
Updated

2. Accounting Breakeven
Level of sales (or output) that cover all fixed operating costs and variable costs.
Level of sales (or output) in which net operating income (NOI) equals zero.
Minimum level of sales (or output) that the firm must achieve in order to avoid losing money – that is, to break even.

3. Accounting Breakeven Fixed operating costs (Indirect costs):
Do not vary directly with sales
Ex.
Fixed cash operating costs – administrative salaries, insurance premium, property taxes, rent
Non-cash fixed operating cost - depreciation expense
Variable costs (Direct costs):
Vary with sales
Sales commissions, wage per hour, material costs, energy costs (fuel, electricity, natural gas), freight costs, and packaging costs

4. Accounting Breakeven

5. Accounting Breakeven Breakeven in sales = $2,375,000
Breakeven in units = 12,500 units

6. Accounting Breakeven
Accounting break-even point is level of sales (or output) that cover all fixed operating costs and variable costs such that NOI = 0.

7. Degree of Operating Leverage
The composition of fixed costs & variable costs vary by firm.
The mix of fixed & variable operating costs determines the degree of operating leverage (DOL).
DOL measures the responsiveness of operating profits (NOI) to a change in sales.
The higher the DOL, the greater is the volatility of NOI in response to a given change in sales.
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8. Degree of Operating Leverage
Table 13-1: How Operating Leverage Affects NOI for a 20% Increase in Sales
DOL = 40%÷20% = 2
Interpretation

9. Degree of Operating Leverage
Table 13-2: How Operating Leverage Affects NOI for a 20% Decrease in Sales
DOL = -40%÷-20% = 2
Interpretation

10. Degree of Operating Leverage
TCM =
DOL = 1 + TFC
NOI
= NOI + TFC
= TCM
DOL = 750,000
375,000
= 2

11. Exercises (End of Chapter)
Q. 8:
Q. 11:

12. Exercises (End of Chapter)
Q. 12:
Q. 13:

13. Personal Summary
Write down one thing you learned in this chapter that is interesting, new, or useful to you.
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