Chapter 8

"There are four major (and related) applications of breakeven analysis:"

"1.New product decisions.""Breakeven analysis may be used to determine the sales volume required for a firm (or an individual product) to break even, given expected sales prices and expected costs." 2.Pricing decisions. "Breakeven analysis may be used to study the effect of changing price and volume relationships on total profits." "3.Modernization or automation decisions." - "Breakeven analysis may be used to analyze the profit implications of a modernization or automation program. In this case a firm is normally substituting fixed costs (such as capital equipment costs) for variable costs (such as direct labor)." 4.Expansion decisions.-"Breakeven analysis may be used to study the aggregate effect of a general expansion in production and sales. In this case the relationships between total dollar sales for all products and total dollar costs for all products are examined in order to identify potential changes in these relationships."

Straight line

24k/10years 0 year - 26000 - 2400 1 year

double declining

.10*2= 20% TIMES 26000 0 year - 26000- - 1 year - 20800 - 5200

MACRS Modified accelerated cost recovery system

0 year 26000------ 1st year14.29 * 26000 2nd year 24.49 * 26000

"Application of linear (straight-line) breakeven analysis requires the acceptance of three major assumptions:

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."

sum of years

Add years up 0-10=55 first year = 10/55 (10/55)*24K 0 year - 26000- ------- 1 year - 21636 -- 4,363

contribution margin is similar to

EBITDA

FIFO LIFO

FIFO-it would cause phatom profits but earnings would look better LIFO- Causeless earnings to be less but cash flow would increase due to less taxes payed

"In order to determine the point at which the new product will break even, one need only solve for the following simple relationship:

Revenue = Fixed costs + Variable costs" X units Sell 500X fixed cost 1650 Variable costs 350X find X X = 11

formula for contribution margin

Revenue-VC=CM

"Breakeven analysis is a simple yet powerful approach to profit planning that illuminates the relationships

among sales, fixed costs, and variable costs. The technique is also commonly referred to as cost-volume-profit analysis. " 1. sales price 2. new product 3. modernization 4. expansion

real property

buildings and their improvments. Land is not depreciable

"The first assumption seems quite reasonable. Fixed costs such as

depreciation expenses, salaries, rental expenses, and so forth normally can be easily identified. Similarly, variable costs, such as the cost of direct labor and materials used, can also be identified clearly in most cases. "

break even formula

profit=revenue-costs=rev-(fixed+variable) N=(FC)/(S-V)

variable costs

raw material

fixed costs example

remains the same independent of production rate. 1.depreciation 2. operatiing labor 3. electricity 4. insurance

contribution leverage

the amount of profit made per unit once the break even point is made.

"As its name implies, breakeven analysis requires the derivation of various relationships among revenue, fixed costs, and variable costs in order to determine

the units of production or volume of sales dollars at which the firm breaks even—that is, where total revenues are exactly equal to the total of fixed and variable costs."