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Breakeven

Breakeven. (C-V-P). Cost. COST: Must include multi-product CVP. Page 1. To make money …. Sell products for more than the sum of variable and fixed costs. ×. +. VCU × units. Selling Price per Unit. Sales Volume. Variable Costs. Fixed Costs. ,. Variable Costs = VCU × Volume.

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Breakeven

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  1. Breakeven (C-V-P) Cost COST: Must include multi-product CVP Page 1

  2. To make money … Sell products for more than the sum of variable and fixed costs × + VCU × units Selling Price per Unit Sales Volume Variable Costs Fixed Costs , Variable Costs = VCU × Volume Page 2

  3. Page 3

  4. Cost behavior patterns are valid within a relevant range of activity. Over time, cost behavior patterns may change. Page 4

  5. Total Cost Cost Variable Cost Fixed Cost A B Activity Semifixed (Total) Cost Question: At 38 units of sales, The total cost is $21,750 And the fixed cost is $17,000. What is variable cost per unit? Answer: Y = a + b(X) $21750 = $17000 +b(38) b = $4750/38 b = $125 Page 5

  6. Rev - VC CM - FC NI 100% 60% VC go away with no production FC occur regardless of production 40% IN TOTAL PER UNIT VCU VC = = % Sales = Revenue !! Rev. SPU CMU CM = = % Rev. SPU Page 6

  7. TR = TC TR = FC + VC + NI SPU(x) = FC + VCU(x) + NI [or NIU(x)] BE occurs when NI = $0 Are equivalent when NI = $0 SPU(x) - VCU(x) = FC + NI x (SPU - VCU) = FC + NI x = FC + NI SP - VCU BE(units) = FC + NI CM per unit BE($) = FC + NI CM Ratio Algebra: “Walla”, BE(units) “Voilà” desired NI per unit in total SPU-VCU CM CM Ratio = SPU Rev Page 7

  8. Fixed Cost Increased FC increases BE Variable Cost per Unit Increased VCU increases BE Selling Price per Unit Increased SPU decreases BE Page 8

  9. how much can the firm mess around (or mess up) before profit goes away? BIG Page 9

  10. Page 10

  11. Alcatraz Artifacts ??? Page 11

  12. Page 12

  13. Cost Breakeven • IN CLASS: • East Meets West Company (A) • BE and desired profit • East Meets West Company (B) • Desired profit as % of revenue • East Meets West Company (E) • Margin of Safety • Alcatraz Artifacts • Multiproduct breakeven • EXTRA: • Deering Banjo Company • East Meets West Company (C) • East Meets West Company (D) Page 13

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