Variable Cost and Net Income Essay

(Starts at the fixed cost line at zero activity) § Determine the break -even point from the intersection of the total cost line and the total revenue line

Fixed costs remain fixed. 3. Variable costs per unit do not change over the relevant range.  Operating Leverage Example of Operating Leverage: Firm 1 Firm 2

The graph shows the fixed cost, variable cost, total cost and Break even volume. The intersection point of total cost and total revenue is called break even point. At break even volume, the organization recovers all its costs. It is a no profit no loss situation.

As you can see above on the table you, there are different figure number that represents different situations of the business, there are the variable costs figures numbers that may change as the business make more sells, the fixed costs which is the costs that do not change in relation to how the business progress. In the table above you will find a blue line which represent the break-even point, this point will show you when the business will

The accounting breakeven point tells how many units the company must sell in year 1 to bring their operating income to zero. This takes into consideration the fixed costs (rent included) plus depreciation. In the case of the Lazy Mower, 7263 units would need to be sold to break even.

Cost behaviour – we need to understand how costs behave at different levels of activity so that we can determine what costs should have been for a trading period and estimate costs for a future period. Cost behaviour studies the way that costs fluctuate. Two

Mock recommends using break-even analysis. It is the volume level between expenses and incomes. A good financial manager needs to make sure that expenses should not be greater than incomes. An effective financial management avoids leading to a damage. The author describes that decrease the unnecessary factor in order to increase incomes and expenses. In

Where Operating Cash Flow* = Level of Cash flow that results in a zero NPV

To avoid making a loss every business must at least break-even by achieving a level of sales that covers its total costs. But what level of sales is necessary to break-even?

In looking at the next possibility where we can use the break even analysis, it would involve the question of how to manufacture a product, in terms of the nature of operations and how it will affect fixed costs. In this instance, we as a company may have a good idea on the quantity expect, the likely selling price, and the variable costs involved, but be uncertain about how to structure the new operation. For example, if the volume expected to be 15,000 units, at a selling price of $5 and variable costs of $3, the break even equation tells us that the fixed costs cannot be greater

Break-even point in total sales dollars =(Fixed expenses)/(CM ratios) = (400,000)/(0.5466) = 732,000 $ (Rounded)

Chapter 9 review: The most important factor of chapter 9 is the break-even analysis. In this chapter, there are two charts showing the break-even points. In a generalized break-even analysis chart, there are two break-even points and in the center of the points remains the profit area. However, in a linear break-even chart, there remains just one break-even point where prior to this point is an operating loss and after the break-even point is a positive operating profit. The break-even points show when an organizations revenue costs and output are equal. In conclusion, managers must be aware of the break-even points of the organization to ensure the organization will be successful.

For the purpose of a model break-even, let’s assume that the fixed expenses look as follows:

Break-even analysis determines the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point.

* CVP analysis is a systematic approach of examining the relationship between the changes in volume, cost, revenue and profit. The main objective of this analysis is to establish what will happen to the financial results if a specified level of activity fluctuates.