Break Even

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Break Even

  1. 1. Cost-Volume-Profit Analysis
  2. 2. Cost-Volume-Profit Assumptions <ul><li>Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold. </li></ul><ul><li>Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. </li></ul>
  3. 3. Cost-Volume-Profit Assumptions <ul><li>When graphed, the behavior of total revenues and total costs is linear (straight-line) in relation to output units within the relevant range (and time period). </li></ul><ul><li>The unit selling price, unit variable costs, and fixed costs are known and constant. </li></ul>
  4. 4. Cost-Volume-Profit Assumptions <ul><li>The analysis either covers a single product or assumes that the sales mix when multiple products are sold will remain constant as the level of total units sold changes. </li></ul><ul><li>All revenues and costs can be added and compared without taking into account the time value of money. </li></ul>
  5. 5. Cost-Volume-Profit Analysis <ul><li>Operating income = </li></ul><ul><li>Total revenues from operations – </li></ul><ul><li>Cost of goods sold and operating costs </li></ul><ul><li>(excluding income taxes) </li></ul><ul><li>Net income = Operating income – Income taxes </li></ul>
  6. 6. Breakeven Point Sales Variable expenses Fixed expenses – = Total revenues = Total costs
  7. 7. Breakeven Point (Selling price × Quantity sold) – (Variable unit cost × Quantity sold) – Fixed costs = Operating income
  8. 8. Breakeven Point
  9. 9. Target Operating Income <ul><li>(Fixed costs + Target operating income) divided either by Contribution margin percentage or Contribution margin per unit </li></ul>

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