Financial Management LiveText Assignment
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This document contains calculations to determine a company's break even point in units (15,000), income statement at break even, units (20,000) needed to meet a profit goal of $120,000, and operating income if 22,000 units are sold ($168,000). It also explains that higher variable costs increase the break even point while lower variable costs decrease it, and that lower fixed costs decrease the break even point while higher fixed costs increase it.
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1Break-Even AnalysisMarketers need to understand break.docx
1
Break-Even Analysis
Marketers need to understand break-even
analysis because it helps them choose the
best pricing strategy and make smart
decisions about the short- and long-term
profitability of the product.
This is an analysis that tells you how many
products you need to sell to cover your costs.
Profitability
Profitability Definitions
Revenue the money we take in from sales
Cost the money it costs us to make and sell our product
Profit the money we have left over from our revenue
after we pay all of our costs
Revenue - Costs = Profit
Price the money a consumer pays for one unit of product
the money we take in from one unit of product
Price x Units = Revenue
Revenue/Units = Price
2
Exercise 1
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
1. What was Stick-It-Up’s total sales revenue in August?
2. What was Stick-It-Up’s total profit in August?
3. What product contributed the most to sales revenue in August?
What percentage of the sales revenue did it contribute?
4. What product contributed the most to profit in August? What
percentage of the profit did it contribute?
5. If sales of magnetic white boards went up by 20%, how much
more would it contribute to sales revenue? To profits?
6. Suppose that increasing sales of magnetic white boards by 20%
would cost the company $500 per month in advertising expenses.
Should they spend the $500 per month on additional advertising?
Exercise 1
What was Stick-It-Up’s total revenue in August?
Revenue from:
Bulletin Boards 400 x $3.00 $1,200.00
Magnetic White Boards 600 x $4.00 $2,400.00
Combination Boards 250 x $5.00 $1,250.00
Total Revenue $4,850.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
3
Exercise 1
What was Stick-It-Up’s total profit in August?
Cost of:
Bulletin Boards 400 x $1.00 $400.00
Magnetic White Boards 600 x $3.00 $1,800.00
Combination Boards 250 x $3.50 $875.00
Total Cost $3,075.00
Profit = Total Revenue - Total Cost = $4,850 - $3,075 = $1,775
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What was Stick-It-Up’s total profit in August?
Profit on:
Bulletin Boards 400 x ($3.00-$1.00) $800.00
Magnetic White Boards 600 x ($4.00-$3.00) $600.00
Combination Boards 250 x ($5.00-$3.50) $375.00
Total Profit $1,775.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What product contributed the most to revenue in August? What
percentage did it contribute?
Bulletin Boards $1,200.00
Magnetic White Boards $2,400 ...
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Financial Management LiveText Assignment
- 1. Lawrence Washington BPS 410 Mr. Taylor January 24, 2015 Electronic Portfolio Project I. Calculation of annual Break Even Point in units Selling Price = $100.00 Variable Cost per Unit = $76.00 Total Fixed Cost =$360,000 X = Units Selling Price – Variable Cost – Total Fixed Cost = Income 100.00x – 76x – 360,000 = 0 100x- 76x +360,000 = + 360,000 24x = 360,000 24x / 24 360,000 / 24 x = 15,000 Units
- 2. II. Prepared Income Statement Sales 15,000 Units x $100 $1,500,000 Variable Cost 15,000 Units x $76 -$1,140,000 Fixed Cost - $360,000 Income = 0
- 3. III. Calculations of units required to be sold to meet company’s profit goal of $120,000 before taxes. Selling Price = $100.00 Variable Cost per Unit = $76.00 Total Fixed Cost =$360,000 100x – 76x – 360,000 = 120,000 24x 480,000 24x = 480,000 24x / 24 480,000 / 24 x = 20,000
- 4. IV. Calculated operating income loss if company sells 22,000 units. Sales 22,000 Units x $100 $2,200,000 Variable Cost 22,000 Units x $76 -$1,672,000 Fixed Cost - $360,000 Income = $168,000
- 5. V. What impact does a change in variable costs have on the breakeven point? When a company’s variable cost rises additional units must be sold to recover its costs and break even. When variable costs go down the company is not required to units at the same volume in order to reach the breakeven point. VI. What impact does a change in fixed costs have on the breakeven point When a companies fixed costs drop the breakeven point drops as well. This is the result of needing to sell fewer units to recover the company’s fixed costs. When fixed costs begin to rise the breakeven point rises to meet the company’s need to recover operating costs.