Variable Costs. Breakeven Analysis. Examples of Variable Costs. Variable Costs. Mixed

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1 Breakeven Analysis Variable Vary directly in proportion to activity: Example: if sales increase by 5%, then the Variable will increase by 5% Remain the same, regardless of the activity level Mixed Combines variable and fixed costs Variable Variable VARY directly in proportion to the changes in Activity Level Sales 10% Variable 10% If the activity level (sales) increases 10%, then Variable will increase % also Examples of Variable Raw Materials Production Labor Variable Overhead Sales Commissions Shipping Factory Power 1

2 Examples of Depreciation Rental Building Insurance Automobile Insurance Property Plant Repair GRAPH OF VARIABLE COSTS No activity = zero costs Variable More activity means more costs Begin at the (zero, zero) and draw the line to the upper right GRAPH OF FIXED COSTS Begin at Y-axis and draw horizontal Fixed uantity in terms of units sold or produced 2

3 Fixed Cost + Variable Cost equals TOTAL COSTS Add the height of the Variable Cost Line to the height of Fixed Cost Line TOTAL COST LINE Variable Fixed At the Y axis, variable costs = 0 So Total = GRAPH OF TOTAL COSTS TOTAL COST LINE Variable In other words, stack the Variable Cost Line on top of the Fixed Cost Line Breakeven Point is crossing point of Revenue line and Total Cost line REVENUES & TOTAL COSTS Breakeven Point Total Revenue Cost = 0 so Net Income is zero at Breakeven Point 3

4 Revenues < = Loss Total are more than (above) Revenue, so Net Income is a When uantity is less than Breakeven Net Income = Revenue - Cost Revenue Total Revenues > = Profit When uantity is more than Breakeven Point Revenue Total Then the Revenue line is above (higher) than Total Cost line, so Net Income is a Net Income = Revenue - Cost CONTRIBUTION Unit Contribution = Price - Variable Cost per unit OR (Sales Total Variable ) Contribution Margin = Sales Use the Units Contribution (top) formula when the problem is in units, but use the Contribution Margin (bottom) formula instead when the problem gives the Total Sales and Total 4

5 BE = Fixed Cost Contribution Breakeven Units = OR Use the BE Units (top) formula when the problem is in units, and the BE Sales (bottom) formula when the problem gives Total and Total Variable BREAKEVEN UNITS Breakeven Units = Example: Acme Manufacturing s are 120,000 per period, and the price per Roadrunner Trap is 25 while the Variable Cost per trap is 20 Breakeven Units = 120,000 (25-20) BREAKEVEN SALES Example: Acme Manufacturing s are 120,000 per period, while the sales are 750,000 and variable costs are 600, ,000 (750, ,000) 750,000 5

6 Comparison of BE Points Example: Acme Manufacturing s are 120,000 per period, and the price per Roadrunner Trap is 25 while the Variable Cost per trap is 20 Acme sold 30,000 traps for a total of 750,000 in sales and 600,000 in variable costs Breakeven Units = Breakeven Units = 24,000 Roadrunner Traps 600,000 24,000 traps at 25 price each equals 600,000 Net Income = Y Example: Acme Manufacturing s are 120,000 per period, and the price per Roadrunner Trap is 25 while the Variable Cost per trap is 20 Compute the Net Income if Acme sells 32,000 traps Net Income = Price* Variable Cost* Fixed Cost Net Income = 25*32,000 20*32, ,000 Y = Net Income Example: Acme Manufacturing s are 120,000 per period, and last year Acme sold 30,000 traps for a total of 750,000 in sales and 600,000 in variable costs Compute projected Y if projected sales = 800,000 Variable Cost Percentage = (VC Sales) last year sales AND Net Income = Sales (VC% * Sales) Fixed Cost Variable Cost %= 600, ,000 =.800 VC% Net Income = 800,000 (.800*800,000) 120,000 6

7 Comparison of Net Example: Acme Manufacturing s are 120,000 per period, and the price per Roadrunner Trap is 25 while the Variable Cost per trap is 20; and last year Acme sold 30,000 traps for a total of 750,000 in sales and 600,000 in variable costs Compute the projected Net Income if next year Acme sells 32,000 traps for total sales of 800,000 Net Income = Price* Variable Cost* Fixed Cost Net Income = 800, , ,000 Net Income = 40,000 Variable Cost Percentage = (VC Sales) last year sales AND Net Income = Sales (VC% * Sales) Fixed Cost Net Income = 800,000 (.800*800,000) 120,000 Net Income = 40,000 SUMMARY of TERMS Variable vary directly with the activity level are assumed to stay the same Mixed consist of both variable & fixed costs Total Cost = Variable + Breakeven Pt is where Total Cost = Total SUMMARY OF FORMULAS UNITS Breakeven Units Total Sales& Breakeven Projected Income Projected Income Projected uantity = Last year s numbers P V Fc = Y VC% = (Variable Cost Sales) Projected Sales & FC S (VC% * S) Fc = Y Use Units (left) formulas when problem is in units, and Total Sales& (right) formulas when the problem gives Total Sales and Total Variable 7

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