Variable Costs. Breakeven Analysis. Examples of Variable Costs. Variable Costs. Mixed

(1)

Breakeven Analysis

Vary directly in proportion to activity: Example: if sales increase by 5%, then the Variable Costs will increase by 5%

Variable Costs

Fixed Costs

Remain the same, regardless of the activity level

Mixed ________

Combines variable and fixed costs

Variable Costs

Variable Costs VARY directly in proportion to the changes in Activity Level

If the activity level (sales) increases 10%, then Variable Costs will increase _____% also

Sales Variable Costs

10% 10%

Examples of Variable Costs

Raw Materials Production Labor __________ Variable Overhead Sales Commissions Shipping Costs Factory Power

(2)

Examples of Fixed Costs

Depreciation Rental ____________ Building Insurance Automobile Insurance Property _________ Plant Repair

GRAPH OF VARIABLE COSTS

$

Q

No activity

= zero costs _Variable

Costs

Begin at the ______ (zero, zero) and draw the line to the upper right More activity

means more costs

GRAPH OF FIXED COSTS

$

Begin at Y-axis and draw horizontal _____ Fixed Costs

(3)

Fixed Cost + Variable Cost

equals TOTAL COSTS

$

Q

Add the height of the Variable Cost Line to the height of

Fixed Cost Line _Fixed

Costs Variable Costs

At the Y axis, variable costs = 0 So Total Costs = Fixed Costs

TOTAL COST LINE

GRAPH OF TOTAL COSTS

$

Q

In other words, stack the Variable Cost Line on top of the Fixed Cost Line

Variable Costs TOTAL COST LINE

REVENUES &

TOTAL COSTS

$

Q

Breakeven Point is crossing point of Revenue line and Total Cost line

Total Costs

Breakeven Point

Revenue – Cost = 0 so Net Income is zero

(4)

Revenues < Costs = Loss

$

Q

Net Income = Revenue - Cost

Revenue Total Costs When Quantity is less than Breakeven Total Costs are

more than (above) Revenue, so Net Income is a ______

Revenues > Costs = Profit

$

Q

Revenue Total Costs When Quantity is more than Breakeven Point

Then the Revenue line is above (higher) than Total Cost line, so Net Income is a ______

Net Income = Revenue - Cost

CONTRIBUTION

Unit Contribution = Price - Variable Cost per unit

OR

Contribution Margin =(Sales – Total Variable Costs) Sales

(5)

BE = Fixed Cost ÷ Contribution

Fixed Costs (Price – Variable Cost) Breakeven Units =

OR

Breakeven Sales =_{(Sales-Variable Cost)÷Sales}Fixed Costs

Use the BE Units (top) formula when the problem is in units, and the BE Sales (bottom) formula when the problem gives Total ________ and Total Variable Costs

BREAKEVEN UNITS

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, and the price per Roadrunner Trap is $25 while the Variable Cost per trap is $20

Breakeven Units = $120,000 ÷ ($25 - $20)

BREAKEVEN SALES

Fixed Costs

(Sales-Variable Cost)÷Sales Breakeven Sales =

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, while the sales are $750,000 and variable costs are $600,000

$120,000

($750,000-$600,000)÷$750,000

(6)

Comparison of BE Points

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, and the price per Roadrunner Trap is $25 while the Variable Cost per trap is $20 Acme sold 30,000 traps for a total of $750,000 in sales and $600,000 in variable costs

Breakeven Units = 24,000 Roadrunner Traps

Fixed Costs

(Sales-Variable Cost)÷Sales Breakeven Sales =

Breakeven Sales = $600,000

24,000 traps at $25 price each equals $600,000

Net Income = Y

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, and the price per Roadrunner Trap is $25 while the Variable Cost per trap is $20 Compute the Net Income if Acme sells 32,000 traps Net Income = Price*Q –Variable Cost*Q – Fixed Cost Net Income = $25*32,000 – $20*32,000 – $120,000

Y = Net Income

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, and last year Acme sold 30,000 traps for a total of $750,000 in sales and $600,000 in variable costs

Compute projected Y if projected sales = $800,000 Variable Cost Percentage = (VC÷Sales) last year sales AND Net Income = Sales – (VC% * Sales) – Fixed Cost

(7)

Comparison of Net ________

Example: Acme Manufacturing’s Fixed Costs are $120,000 per period, and the price per Roadrunner Trap is $25 while the Variable Cost per trap is $20; and last year Acme sold 30,000 traps for a total of $750,000 in sales and $600,000 in variable costs Compute the projected Net Income if next year Acme sells 32,000 traps for total sales of $800,000

Net Income = Price*Q –Variable Cost*Q – Fixed Cost Net Income = $800,000 – $640,000 – $120,000 Net Income = $40,000

Variable Cost Percentage = (VC÷Sales) last year sales AND Net Income = Sales – (VC% * Sales) – Fixed Cost

Net Income = $800,000 – (.800*$800,000) – 120,000 Net Income = $40,000

SUMMARY of TERMS

Variable Costs vary directly with the activity level

Fixed Costs are assumed to stay the same Mixed Costs consist of both variable & fixed costs Total Cost = Variable Costs + Fixed Costs

Breakeven Pt is where Total Cost = Total __________

Fixed Costs (Price – Variable Cost)

SUMMARY OF FORMULAS

Fixed Costs (Sales-Variable Cost)÷Sales

Use Units (left) formulas when problem is in units, and Total Sales&Costs (right) formulas when the problem gives Total Sales and Total Variable Costs PQ – VQ – Fc = Y VC% = (Variable Cost ÷ Sales)Last year’s numbers

S – (VC% * S) – Fc = YProjected Sales & FC

UNITS

Total Sales&Costs

Breakeven Units Breakeven __________

Projected Income Projected Income