Break-Even Point AnalysisThe break-even point is usually expressed as the amount of revenue that must berealized for the firm (or product or activity or group of products or activities) to haveneither profit nor loss (that is, operating income equal to zero). The break-even pointis useful to managers because it expresses a minimum revenue target, and managersfrequently find it easier to think in terms of revenues rather than variable and fixedexpenses. In addition, the amount of sales (or revenues) generated by the firm is easilydetermined daily from the accounting system.The contribution margin model is used to determine the break-even point by setting operating income equal to zero and solving the model for the revenue or physicalsales volume that will cause that result. The calculation of break-even point in termsof units and total revenues is illustrated here:Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12Variable expenses per unit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Total fi xed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000Per Unit 3 Volume 5 Total %Revenue . . . . . . . . . . . . . . $ 12Variable expenses . . . . . . . 8Contribution margin. . . . . . $ 4 3 ? 5 ? 33.3%Fixed expenses . . . . . . . . . 45,000Operating income . . . . . . . $ 0LO 11Describe the meaningand significance of thebreak-even point andillustrate how the breakeven point is calculated.proportion of total sales accounted for by different products or services. Because different products or services are likely to have different contribution margin ratios, theaverage contribution margin ratio for a given mix of products or services will changeif the sales mix of the products or services changes.The effect of a sales mix change is illustrated in Exhibit 12-6. Sales mix is animportant concept to understand because almost all firms have multiple products orservices. When there is a range of quality to a firm’s products (good, better, best), thehigher-quality products generally have higher contribution margin ratios, so marketing efforts frequently focus on those products. On the other hand, a strategy that somefirms try to follow is to price their products to achieve a contribution margin ratio thatis about the same for all products. A company that can achieve this approximate parityin contribution margin ratios among its products doesn’t have to be concerned, from aproduct profitability standpoint, about sales mix changes. Thus, marketing efforts canbe more broadly based than if sales mix were a consideration.10. What does it mean that fi xed expenses should not be unitized because theydon’t behave that way?11. What does it mean to state that contribution margin ratio is frequently a moreuseful measurement than contribution margin per unit?QWhat DoesIt Mean?A n s w e r s o np a g e 4 8 6mar2529X_ch12_458-503.indd 475 26/11/12 2:05 PMExhibit 12-6 Multiple Products and Sales MixI. Assume that a company has two products. Per unit revenue, variable expenses, and product volumes for present operations follow:Product APer Unit 3 Volume 5 Total %Product BPer Unit 3 Volume 5 Total %TotalCompanyTotal %Revenue $ 40 3 2,000 5 $80,000 $ 30 3 2,000 5 $60,000 $140,000 100%Variable expenses 30 18Contribution margin $ 10 3 2,000 5 $20,000 25% $ 12 3 2,000 5 $24,000 40% $ 44,000 31.4%Fixed expenses 30,000Operating income $ 14,000Note that fi xed expenses are shown only in the Total Company column because they apply to the company as a whole, not to individual products.II. Now assume that the sales mix changes and that, instead of sales volume of 2,000 units of each product, sales volume becomes2,500 units of product A and 1,500 units of product B. The company’s contribution margin format income statement becomes this:Product APer Unit 3 Volume 5 Total %Product BPer Unit 3 Volume 5 Total %TotalCompanyTotal %Revenue $ 40 3 2,500 5 $100,000 $ 30 3 1,500 5 $45,000 $145,000 100%Variable expenses 30 18Contribution margin $ 10 3 2,500 5 $ 25,000 25% $ 12 3 1,500 5 $18,0
Break-Even Point Analysis
The break-even point is usually expressed as the amount of revenue that must be
realized for the firm (or product or activity or group of products or activities) to have
neither profit nor loss (that is, operating income equal to zero). The break-even point
is useful to managers because it expresses a minimum revenue target, and managers
frequently find it easier to think in terms of revenues rather than variable and fixed
expenses. In addition, the amount of sales (or revenues) generated by the firm is easily
determined daily from the accounting system.
The contribution margin model is used to determine the break-even point by setting operating income equal to zero and solving the model for the revenue or physical
sales volume that will cause that result. The calculation of break-even point in terms
of units and total revenues is illustrated here:
Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12
Variable expenses per unit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Total fi xed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000
Per Unit 3 Volume 5 Total %
Revenue . . . . . . . . . . . . . . $ 12
Variable expenses . . . . . . . 8
Contribution margin. . . . . . $ 4 3 ? 5 ? 33.3%
Fixed expenses . . . . . . . . . 45,000
Operating income . . . . . . . $ 0
LO 11
Describe the meaning
and significance of the
break-even point and
illustrate how the breakeven point is calculated.
proportion of total sales accounted for by different products or services. Because different products or services are likely to have different contribution margin ratios, the
average contribution margin ratio for a given mix of products or services will change
if the sales mix of the products or services changes.
The effect of a sales mix change is illustrated in Exhibit 12-6. Sales mix is an
important concept to understand because almost all firms have multiple products or
services. When there is a range of quality to a firm’s products (good, better, best), the
higher-quality products generally have higher contribution margin ratios, so marketing efforts frequently focus on those products. On the other hand, a strategy that some
firms try to follow is to price their products to achieve a contribution margin ratio that
is about the same for all products. A company that can achieve this approximate parity
in contribution margin ratios among its products doesn’t have to be concerned, from a
product profitability standpoint, about sales mix changes. Thus, marketing efforts can
be more broadly based than if sales mix were a consideration.
10. What does it mean that fi xed expenses should not be unitized because they
don’t behave that way?
11. What does it mean to state that contribution margin ratio is frequently a more
useful measurement than contribution margin per unit?
Q
What Does
It Mean?
A n s w e r s o n
p a g e 4 8 6
mar2529X_ch12_458-503.indd 475 26/11/12 2:05 PM
Exhibit 12-6 Multiple Products and Sales Mix
I. Assume that a company has two products. Per unit revenue, variable expenses, and product volumes for present operations follow:
Product A
Per Unit 3 Volume 5 Total %
Product B
Per Unit 3 Volume 5 Total %
Total
Company
Total %
Revenue $ 40 3 2,000 5 $80,000 $ 30 3 2,000 5 $60,000 $140,000 100%
Variable expenses 30 18
Contribution margin $ 10 3 2,000 5 $20,000 25% $ 12 3 2,000 5 $24,000 40% $ 44,000 31.4%
Fixed expenses 30,000
Operating income $ 14,000
Note that fi xed expenses are shown only in the Total Company column because they apply to the company as a whole, not to individual products.
II. Now assume that the sales mix changes and that, instead of sales volume of 2,000 units of each product, sales volume becomes
2,500 units of product A and 1,500 units of product B. The company’s contribution margin format income statement becomes this:
Product A
Per Unit 3 Volume 5 Total %
Product B
Per Unit 3 Volume 5 Total %
Total
Company
Total %
Revenue $ 40 3 2,500 5 $100,000 $ 30 3 1,500 5 $45,000 $145,000 100%
Variable expenses 30 18
Contribution margin $ 10 3 2,500 5 $ 25,000 25% $ 12 3 1,500 5 $18,0
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