Accounting and Management

Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%

The percentage Breakeven Sales Change can be calculated simply by dividing the unit sales change by the initial sales level, or may be calculated more directly with the following expression:

In order to calculate the breakeven point, we use the following equation and budget data:

Although the financial goal is to create profit, we need to calculate the breakeven point to get started.

5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.

Determine the unit break-even point, assuming fixed costs are $60,000 per period, variable costs are $16.00 per unit, and the sales price is $25.00 per unit.

The breakeven point is used my companies to prevent loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume

Analyze the breakeven point for Competition Bikes Inc. with regard to sales units and sales dollars for both CarbonLite and Titanium bikes.

According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include:

The president of Cold Moo Ice Cream Company, a chain of ice cream stores in the Midwest, was unhappy with the actual six-month profit figures for the company recently prepared by the CFO. The president asked the CFO for a profit breakdown, by store, of the actual six-month results. When the president received the report, he was extremely upset and called the CFO into his office. The president stated, "These reports show that each store in the chain is profitable, but our company results are unprofitable! How can this be?" The CFO pointed out that each store was allowed to set prices for ice cream based on its cost structure. However, the stores' cost structures did not include headquarters costs or the costs of advertising and delivery of products.

Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)

Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs

A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.

Break Even Point in Sales = (Total Fixed Costs + Target Profit) ÷ Contribution Margin Ratio

This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that