Ch10_Solution- Holden book Ch16
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Illinois State University *
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341
Subject
Accounting
Date
May 4, 2024
Type
xlsx
Pages
7
Uploaded by DoctorHippopotamus9533
Based On Accounting Profit
Inputs
Fixed Costs
$30,000 30
Sales Revenue / Unit
$6.00 6
Variable Costs / Unit
$4.00 4
Calculate the Break-even Point using the Formula
Break-even Point (Unit Sales)
15,000
Break-Even point (units) = Fixed Costs ÷ (Sales revenue per unit – Variable costs per u
Back solve for the Break-even Point using the Income Statement
Unit Sales
12,000
Sales Revenue
$72,000 Variable Costs
$48,000 Gross Margin
$24,000 Fixed Costs
$30,000 Accounting Profit
($6,000)
B
REAK-
E
VEN
A
NALYSIS
0 5,000 10,000 15,000 20,000 ($60,000)
($30,000)
$0 $30,000 $60,000 $90,000 $120,000 $150,000 Break-Even Point Based On Acct. Profit = 0
Total Costs
Sales Revenue
Account-
ing Profit
Unit Sales
)
7
(
Gross Margin - Fixed Costs
Enter =B21-B22
)
7
(
Gross Margin - Fixed Costs
Enter =B21-B22
Data Table: Sensitivity of Costs, Revenues, and Acct. Profit to Unit Sales
Input Values for Unit Sales
Output Formulas:
0 5,000 10,000 15,000 20,000 Total Costs
$78,000 Sales Revenue
$72,000 Accounting Profit
($6,000)
($30,000)
($20,000)
($10,000)
$0 $10,000
and generates sales revenue of $6.00 per unit. What is the break-even point in
unit sales, where accounting profit exactly equals zero, and what is the intuition
for it?
formula. Second, we use Excel's Solver to back solve for the break-even point
using the income statement. Lastly, we will determine the sensitivity of costs,
revenues, and accounting profits to unit sales. This will allow us to graphically
illustrate the intuition of the break-even point.
unit) Problem
. A project has a fixed cost of $30,000, variable costs of $4.00 per unit,
Solution Strategy
. First, we solve for the break-even point in unit sales using the
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graph illustrates two equivalent intuitions for this result. First, the Break-Even
Point is where the Sales Revenue line (in blue) crosses Total Costs line (in red).
Second, the Break-Even Point is where Accounting Profit (in orange) hits zero
and thus decisively switches from negative to positive.
The formula and the graph show that the Break-Even Point is 15,000
units. The
Based On NPV
(in thousands of $)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Key Assumptions
Sales Growth Rate
55.0%
40.0%
25.0%
5.0%
-20.0%
-50.0%
Change in Sales Growth Rate
-15.0%
-15.0%
-20.0%
-25.0%
-30.0%
Inflation Rate
2.0%
2.5%
3.0%
3.5%
4.0%
4.0%
4.0%
Real Cost of Capital
11.0%
11.2%
11.4%
11.6%
11.8%
12.0%
12.2%
Tax Rate
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
Discounting
Discount Rate = Cost of Capital
13.2%
14.0%
14.7%
15.5%
16.3%
16.5%
16.7%
Cumulative Discount Factor
0.0%
13.2%
29.0%
48.1%
71.0%
98.9%
131.6%
170.3%
Price or Cost / Unit
Unit Sales
1,875
2907
4070
5087
5342
4273
2137
Sales Revenue / Unit
$9.70 $9.94 $10.24 $10.60 $11.02 $11.46 $11.92 Variable Cost / Unit
$7.40 $7.59 $7.81 $8.09 $8.41 $8.75 $9.10 Cash Fixed Costs
$5,280 $5,412 $5,574 $5,769 $6,000 $6,240 $6,490 Cash Flow Forecasts
Sales Revenue
$18,192 $28,903 $41,678 $53,921 $58,881 $48,989 $25,474 Variable Costs
$13,879 $22,050 $31,796 $41,135 $44,920 $37,373 $19,434 Gross Margin
$4,314 $6,853 $9,882 $12,785 $13,962 $11,616 $6,040 Cash Fixed Costs
$5,280 $5,412 $5,574 $5,769 $6,000 $6,240 $6,490 Depreciation
$1,421 $1,421 $1,421 $1,421 $1,421 $1,421 $1,421 Total Fixed Costs
$6,701 $6,833 $6,996 $7,191 $7,422 $7,662 $7,911 Operating Profit
($2,388)
$20 $2,887 $5,594 $6,540 $3,954 ($1,871)
Taxes
($836)
$7 $1,010 $1,958 $2,289 $1,384 ($655)
Net Profit
($1,552)
$13 $1,876 $3,636 $4,251 $2,570 ($1,216)
Add Back Depreciation
$1,421 $1,421 $1,421 $1,421 $1,421 $1,421 $1,421 Operating Cash Flow
($131)
$1,434 $3,298 $5,058 $5,672 $3,992 $205 B
REAK-
E
VEN
A
NALYSIS
Investment in Plant & Equip
($11,350)
$1,400 Cash Flows
($11,350)
($131)
$1,434 $3,298 $5,058 $5,672 $3,992 $1,605 Present Value of Each Cash Flow
($11,350)
($115)
$1,111 $2,227 $2,957 $2,852 $1,723 $594 Net Present Value
($0)
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Data Table: Sensitivity of Net Present Value to Year 1 Unit Sales
and Year 2 Sales Growth Rate
Output Formula:
Input Values for Year 1 Unit Sales
Net Present Value
($0)
1,700 1,900 2,100 2,300 45.0%
Input Values for Year 2
50.0%
Sales Growth Rate
55.0%
60.0%
65.0%
45.0%
50.0%
55.0%
60.0%
65.0%
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 1,700 1,900 2,100 2,300 NPV Break-Even Contour (Based On NPV = 0) Across Year 1 Unit Sales And Year 2 Sales Growth Rate
Year 2 Sales Growth Rate
Net Present Value
Year 1 Unit Sales
NPV Break-Even
Contour
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Use the following data to compute the selling price on these financial accounting
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7
8
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Target Profit
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10 Required:
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12
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20
Break-even in unit sales
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180,000
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20,000
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10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
12.50
7.50
5.00
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%
100%
60%
40%
Variable Expenses Fixed Expenses Total Expenses Sales dollars
Margin of Safety
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Margin of safety in dollars (a)-(b)
Margin of safety percentage
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UNIT SELLING PRICE
UNIT VARIABLE COSTS
UNIT CONTRIBUTION MARGIN
CONTRIBUTION MARGIN RATIO
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$330
(a)$___
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(c) $___
$110
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(e) $___
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Contribution margin
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Fixed Cost
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3,009
$
2,891
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Denominator:
1
Contribution Margin
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/Sales
$
$
2,891 /
5,900
490
=
11
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Contribution margin ratio
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