Fin man 5 break even point and leverage analysis

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Fin man 5 break even point and leverage analysis

  1. 1. Financial Management Class #5 …………………………………………………………………Jimmi SintonTe a c h i n g S e r i e s
  2. 2. 5-14 Break Even Point & Leverage AnalysisTopicsMaterialsCovered… … … … …… Please read pengertian dan penjelasan analisa each material BEP before class and rehearse it after classJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  3. 3. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Breakeven analysis (cost-volume-profit analysis): approach to profit planning that requires derivation of various relationships among revenue, fixed costs, and variable costs in order to determine units of production or volume of sales dollars at which firm “breaks even” (where total revenues equal total of fixed and variable costs) Assumptions of Breakeven Analysis 1. Costs can be reasonably subdivided into fixed and variable components. 2. All cost-volume-profit relationships are linear. 3. Sales prices will not change with changes in volume.J i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  4. 4. 5-14 Break Even Point & Leverage Analysis Break-even Analysis • The break-even point is the point where Total sales revenue = total costs or Total contribution margin = total fixed costs. • Break-even analysis can be approached in two ways: Equation method Contribution margin method.J i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  5. 5. 5-14 Break Even Point & Leverage Analysis Break-even Analysis two types of costs that a business faces: Variable costs Variable Costs Biaya $ which vary proportionally with sales hourly wages Fixed Costs utility costs raw materials Fixed costs Unit Produksi which are constant over a relevant range of sales executive salaries lease payments depreciationJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  6. 6. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Four major applications: 1. New product decisions 2. Pricing decisions 3. Modernization or automation decisions. 4. Expansion decisions.J i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  7. 7. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Operating (Accounting) BEP level of sales (either units or dollars) at which EBIT is equal to zero: VC = total variable costs FC = total fixed costs Sales VC FC 0 Q = the quantity P = price per unit V = variable cost per unit Q P v FC 0 find the operating BEP in units (Q*) by simply solving for Q: Where CM$/unit is the contribution margin per unit sold (i.e., CM$/unit = p - v) * FC FC The contribution margin per unit is the Q amount that each unit sold contributes to p v CM$ / unit paying off the fixed costsJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  8. 8. 5-14 Break Even Point & Leverage Analysis Break-even Analysis The Operating Break-even in Dollars calculate the operating break-even point in sales dollars by simply multiplying the break-even point in units by the price per unit: BE$ Q* p  Note that we can substitute the previous definition of Q* into this equation: FC FC FC BE$ p p v p v CM % p  Where CM% is the contribution margin as a % of the selling priceJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  9. 9. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Example Suppose that a company has fixed costs of $100,000 and variable costs of $5 per unit. What is the break-even point if the selling price is $10 per unit? * 100,000 Q 20,000 units 10 5 Or BE$ 20,000 10 $200,000 Or 100,000 BE$ $200,000 10 5 10J i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  10. 10. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Targeting EBIT We can use break-even analysis to find the sales required to reach a target level of EBIT * FC EBITT arg et Q T arg et p v  Note that the only difference is that we have defined the break-even point as EBIT being equal to something other than zeroJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  11. 11. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Example Suppose that we wish to know how many units the company (from the previous example) needs to sell such that EBIT is equal to $500,000: 100,000 500,000 Q* 120,000 units 10 5 Or BE$ 120,000 10 $1,200,000 Or 100,000 500,000 BE$ $1,200,000 10 5 10J i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  12. 12. 5-14 Break Even Point & Leverage Analysis Break-even Analysis Cash Break-even Points Note that if we subtract the depreciation expense (a non- cash expense) from fixed cost, we can calculate the break- even point on a cash flow basis: * FC Depreciation Q T arg et p vJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management
  13. 13. 5-14 Break Even Point & Leverage Analysis Home Work You are given the following information for Firm XYZ: Fixed operating costs = $500,000 Variable operating costs per unit = $40/unit Sales price per unit = $50/unit Calculate the break-even point in units for: (treat each scenario independently) a. fixed costs decrease to $450,000 b. variable cost decreases to $37 per unit c. sales price increases to $55/unit d. changes for a, b, c, occur simultaneouslyJ i m m i S ei ni t o nT e a c h i n g S r e s Financial Management

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