A CONTINUATION OF BREAK EVEN POINT
1. As explained on the previous page , a question may arise when the company wants to know the needed sales amount just to attain a certain PROFIT RATIO.
EXAMPLE:
A companys contribution ratio is 40% and its fixed expenses is pegged at 100,000. The president o the company is asking what sales amount must be attained so that a 10% profit can be achieved.
IF YOU ARE GOING TO DRAW THE PROFIT AND LOSS FORMAT OF THIS SCENARIO, IT WILL LOOK LIKE THIS.
SALES ?
VARIABLE COST ?
CONTRIBUTION MARGIN 40%
FIXED COST ( 100,000)( 30% )
NET PROFIT 10%
Clearly as you can see, the 10% profit is arrived after the fixed cost is deducted from the contribution margin, therefore the fixed cost ratio is 30%.
SO, SINCE 100,000 is equivalent to 30% of sales, divide 100,000 by 30% to arrive at the sales amount .
the formula therefore is: FIXED COST AMOUNT
__________________________ = SALES
Contr. margin ratio - desired profit ratio
2. There may be a situation where a certain specific item in the variable expenses that may increase or decrease by a certain amount or percentage and the question of what would be the effect of such change to the sales amount and finally to the profitability.
EXAMPLE:
Part of the TOTAL variable cost is material cost which represent 10% of the total variable cost. It was known that this material cost will increase by 20%. The president of the company is asking what would be the possible decline in the present profitability RATIO of the company.
this is the present cost content of the variable cost and its ratio to sales price.:
material cost 6.6%
others 13.4%
total variable cost ratio 20.0%
Take note that the material cost is a variable cost, any changes on its ratio is considered the change in the profit ratio.
SINCE THE MATERIAL COST PER UNIT IS NOT AVAILABLE AND THE ONLY AVAILABLE IS ITS RATIO TO SALES PRICE , IT WILL BE DIFFICULT TO KNOW THE AMOUNT OF INCREASE IN MATERIALS COST.
NOW SINCE THIS MATERIAL COST AMOUNT WILL INCREASE BY 20% AND ITS RATIO TO SALES PRICE IS 6.6% , ALL YOU HAVE TO DO IS TO MULTIPLY 6.6% X 20% TO GET THE PERCENTAGE POINTS OF THE DECREASE IN PROFIT RATIO, which is 1.3%
The present profit and loss data is shown below
normal sales 140,000
material cost 9,240 6.6%
others 18,760 28,000 20%
contribution margin 112,000 80%
fixed cost 100,000
net profit 12,000 8.5%
Now applying the formula
NORMAL SALES 140,000
material cost 11,088 ( o9240x1.20%)
others 18,760 29,848 21.3%
margin 110,152
fixed cost 100,000
net profit 10,152 7.2%
the profit in reality decrease from 8.5%, it became 7.2% or a 1.3% decline.
IN THE EVENT THAT THE UNIT PRICE WILL BE INCREASED OR DECREASE, IT MAY NOT FOLLOW THAT THE VARIABLE COST PER UNIT WILL AUTOMATICALLY DECREASE OR INCREASE, UNLESS THE PROBLEM SAYS SO. IF THAT HAPPENS , DO NOT USE THE AMOUNT OF VARIABLE COST IN DETERMINING THE RATIO OF VARIABLE AGAINST THAT REVISED SALES PRICE . YOU SHOULD USE THE VARIABLE COST PER UNIT AS AGAINST THE SELLING PRICE PER UNIT TO GE THE VARIABLE COST RATIO.
EXAMPLE:
last year the profit is 460,000 by selling 148,000 units at 15 .00 per unit. there is a plan to reduce the price to 12.00 per unit and can sell 250,000 units . fixed cost is 428,000.00
question: what would be the profit due to this reduction of price per unit.
last year plan this year
sales 2,220,000
variable cost 1,332,000 60%
contribution margin 888,000
fixed cost 428,000
profit 460,000
the contribution margin was arrived by adding 460,000 plus 428,000 = 888,000
variable cost would be 2,220,000 less 888,000 is 1332,000.
1,332,000 divide 148,000 units = 9.00 as variable cost per unit.
in computing the variable cost of the sales amount of the 250,000 units or 3,000,000 do not use the 60% variable cost ratio because , it is only the price per unit was changed , the total variable cost may have not changed, unless indicated.
Now since the variable cost is 9.00 per unit x 250,000 units = 2,250,000 as variable cost amount
the contribution margint would be 3,000,000 less 2,250,000 = 750,000
the net profit would be 750,000 less 428,000 = 322,000.00
PUTTING THIS IN CORRECT FORMAT
sales 12 X 250,000 3,000,000
cost variable 9x 250,000 2,250,000 75%
contribution margin 750,000
fixed cost 428,000
net profit 322,000
NOW ANOTHER PROBLEM WILL BE ASKED, SUPPOSING WITH 12.00 PRICE, HOW MUCH SALES QTY IS NEEDED TO ATTAIN 460,000 PROFIT
HERE , SINCE , THERE IS NO CHANGE IS THE SELL PRICE OF 12, YOU CAN USE THE VARIABLE COST RATIO 75%.
SALES 12 X 296,000 3,552,000 100%
VARIABLE COST 2,664,000 75%
CONTRIBUTION MARGIN 888,000 25%
FIXED COST 428,000
NET PROFIT 460,000
SINCE 888,000 IS EQUIVALENT TO 25%, DIVIDE 888,000 BY 25% = 3,552,000 DIVIDE 12.00= 296,000 UNITS.
FOR YOU TO MAKE THE COMPUTATION OF BREAK EVEN OR EVEN ANY RELATED PROBLEM OR ISSUES , I WOULD SUGGEST THAT YOU IMMEDIATELY DRAW OUT THE FOLLOWING FORMAT ALWAYS>
QTY PRICE AMOUNT
SALES
VARIABLE COST %
CONTRIBUTION MARGIN %
FIXED COST XX XX
NET PROFIT
JUST ALWAYS FILL UP THE AVAILABLE GIVEN DATA TO ANY OF THE ABOVE AND TRY TO COMPUTE FOR THE UNKNOWN .
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PROBLEMS:
A CO. SELLS ITS PRODUCT AT 50.00 EACH. THE VARIABLE COST IS 35.00. THE FIXED COST IS 195,000. BUT THEY WANT TO REDUCE FIXED COST TO 172,500.
question: how many units to be sold at present fixed cost to break even . how many units to be sold at the reduced fixed cost.to break even.
AS I SAID ALWAYS DRAW UP THE PROFIT AND LOSS FORMAT
present plan
sales 50 x13,000 650,000 575,000 divide 50 11,500 units.
variable 35
cont margin 15 195,000 30%
fixed cost 195,000 172,500
Since the conribution margin is 30% ( 15 divide 50) divide 195,000 by 30% to get the sales amount to breakeven.
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PROBLEM 2
Honda Motor is selling models VTEC AND CRV MODELS , FOR EVERY 3 UNITS SOLD OF VTEC, 1 UNIT IS SOLD FOR CRV. , THE VARIABLE COST TO MANUFACTURE VTEC IS 6.00 PER UNIT , WHILE CRV IS 10. THE TOTAL FIXED COST OF BOTH MODELS IS 140,000.00 THE MANAGEMENT IS ASKING YOU HOW MANY UNITS OF VTEC AND CRV MUST BE SOLD TO BREAK EVEN. AND IF THE SALES MIX WILL CHANGE FROM 2 VTEC TO 1 CRV WHAT IS THE BREAKEVEN QUANTITY.
3 1
VTEC CRV TOTAL
SALES
COST
CONT. MARGIN 6.00 X 15,000 =90,000 10.00X 5,000 50,000 140,000
FIXED COST 140,000
NET PROFIT 0
IF we will assume that only total sales is 4 units , the total contribution margin of VTEC is 18.00, and CRV 10.00 or a total of 28.00 contribution per unit . SO IF THIS 28.00 IS FOR 4 UNITS , 28.00 DIVIDE 4 IS 7.00 PER UNIT IS THE TOTAL AVERAGE CONTRIBUTION MARGIN .
NOW SINCE THE TOTAL FIXED COST IS 140,000 AND THE TOTAL 7 .00 IS THE CONTRIBUTION MARGIN , THEREFORE DIVIDING 140,000 BY 7.00 IS 20,000 UNITS OF VTEC AND CRV. SINCE THE RATIO IS 3 IS TO 1, THEREFORE 20,000 CAN BE DIVIDED AS FF:
VTEC 3 75% X 20,000 = 15,000
CRV 1 25% X20,000 = 5,000
TOTAL 4
SO, 15,000 X 6 CONTRIBUTION MARGIN FOR VTEC = 90,000
5,000 X 10 CONTRIBUTION MARGIN FOR CRV = 50,000
TOTAL CONTRIBUTION MARGIN 140,000
TRY TO SOLVE IF THE COMBINATION IS VTEC 2 CRV 1. THE QTY TO BE SOLD IS NOT WHOLE NUMBER.
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PROBLEM 3.
FORD MOTOR PLANS TO INTRODUCE A NEW PRODUCT ,, ECOVAN . THEIR PLAN IS TO PRICE IT AT 160.00. THEY HAVE AN ALTERNATIVE TO SELL IT AT 145.00. THE VARIABLE COST IS 120.00 . THE FIXED COST IS 625,000.
REQUIRED : WHAT WOULD BE THE NUMBER OF UNITS TO BE SOLD TO BREAK EVEN AT A PRICE OF 160.0 PER UNIT. AND AT 145.00
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problem 4
TOYOTA MOTOR WANTS TO HAVE A PROFIT OF 480,000 AFTER INCOME TAX OF40% . THE PRODUCT MODEL IS VIOS , IS EXPECTED TO SELL 220.00 PER UNITS WITH A VARIABLE COST OF 145.00 FIXED COST IS 550,000.00
HOW MANY UNITS OF VIOS TO SELL TO ATTAIN THE PROFIT GOAL.
SALES 220.00
VARIABLE COST 145.00 65.9%
MARGIN 75.00 34.1%
FIXED COST 550,000
NET PROFIT BEFORE TAX 100%
INCOME TAX ( 40%)
NET INCOME AFTER TAX 480,000 60%
NOW , BEFORE YOU CAN COMPUTE THE NUMBER OF UNITS, YOU MUST BE ABLE TO KNOW THE NET INCOME BEFORE TAX. SINCE THE 40% INCOME TAX IS BASE ON NET INCOME BEFORE TAX, THAT MEANS THE NET INCOME BEFORE TAX IS IN A 100% STATUS, THEREFORE DEDUCTING THE 40% TO 100% IS THE NET INCOME AFTER TAX.
NOW SINCE THE NET INCOME IS 480,000 , YOU CAN NOW COMPUTE THE NET PROFIT BEFORE TAX, IF THAT HAPPENS ,YOU CAN COMPUTE THE CONTRIBUTION MARGIN, SO ON SO FORTH.
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PROBLEM 5
ISUZU SOLD CROSSWIND AND D MAX WITH THE FFF SELLING PRICE AND VARIABLE COST.
price cost
crosswind 60 40
d max 50 35
the current sales revenue of CROSSWIND IS 1,200,000 AND D MAX 500,000 , FIXED COST IS 300,000 BUT ALLOCATED TO PRODUCT LINES BASED ON NUMBER OF UNITS.
THE PRESIDENT WANTS TO HAVE ADDITIONAL SALES OF 2000 UNITS OF D MAX AT A PRICE F 40.00 FOR EXPORT MARKET . D MAX WILL CONTINUE TO SELL THE SAME NUMBER OF UNITS PRESENTLY BEING SOLD FOR DOMESTIC MARKET.
THE VICE PRESIDENT FOR MARKETING ARGUES THAT IF D MAX WILL BE SOLD TO THE EXPORT MARKET AT 40.00, the export quantity should not be sold .
REQUIRED: PREPARE INCOME STATEMENT ,IF THE 2000 IS SOLD TO THE EXPORT MARKET. ALSO IF 2000 IS SOLD TO THE DOMESTIC MARKET INSTEAD.
QTY AMOUNT QTY AMOUNT TOTAL
SALES 20000 1,200,000 12,000 580,000
COST
CONT MARGIN
FIXED COST
NET PROFIT.
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