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348
P11–2, Concluded
8. The possibility of increasing operating income by $1,650,000 (from $43,140,000
to $44,790,000) is a positive point for the proposal. However, there are many
points against the proposal, including the following:
a. The break-even point increases by 24,000 units (from 112,400 to 136,400).
The company should determine the sales potential if the additional product is
349
P11–3
1. Break-Even Sales (units) = arginMonContributiUnit
CostsFixed
=
70$
000,420$ = 6,000 units
3.
4. $140,000 = [8,000 × ($85 – $15) – $420,000]
350
P11–4
1.
Break-Even Units:
Break-Even (units) = $1,088,000
$400 – $240 = 6,800 units
Break-Even Dollars:
Contribution Margin Ratio = $400 – $240
$400 = 40%
$5,000,000
$4,000,000
$3,000,000
Operating
Profit Area
Sales
351
P11–4, Continued
2.
Units sold: $3,200,000 ÷ $400 per unit = 8,000 units
a. b.
8,000 units 10,000 units
Sales ............................................................................ $ 3,200,000 $ 4,000,000
$5,000,000
$4,000,000
$3,488,000
$3,200,000
b
Operating
Profit Area
352
P11–4, Continued
3.
Break-Even (units):
Break-even point: 7,800* units or $3,120,000
*240$-- 400$
000,160$+000,088,1$
Break-Even Dollars:
$5,000,000
$4,000,000
$0
02,000 4,000 6,000 8,000 10,000
7,800
Units of Sales
Loss Area
Operating
Profit Area
353
P11–4, Concluded
4.
a. b.
8,000 units 10,000 units
Sales ........................................................................... $ 3,200,000 $ 4,000,000
Variable costs ............................................................ $ (1,920,000) $ (2,400,000)
354
P11–5
(Overall product is labeled E.)
1. Unit selling price of E [($400 × 80%) + ($800 × 20%)] ................. $480
Unit variable cost of E [($240 × 80%) + ($480 × 20%)] ................ 288
Unit contribution margin of E ...................................................... $192
3. Unit selling price of E [($400 × 20%) + ($800 × 80%)] ................. $ 720
Unit variable cost of E [($240 × 20%) + ($480 × 80%)] ................ 432
4. 5,000 units of E × 20% = 1,000 units of kayaks
5,000 units of E × 80% = 4,000 units of canoes
5. The overall enterprise break-even point decreased from 7,500 units to 5,000
units because the sales mix is weighted more toward the product with the
higher contribution margin per unit of product. Specifically, canoes have a
355
P11–6
1.
ORGANIC HEALTH CARE PRODUCTS INC.
Estimated Income Statement
For the Year Ended December 31, 20Y8
Sales (400,000 × $25) ......................................... $ 10,000,000
Cost of goods sold:
Direct materials (400,000 × $8) .................... $3,200,000
Expenses:
Selling expenses:
Advertising .............................................. $ 1,450,000
Sales salaries and commissions ........... 833,0001
Travel ....................................................... 340,000
Miscellaneous selling expense .............. 42,0002
Total selling expenses ....................... $2,665,000
Administrative expenses:
Office and officers’ salaries ................... $ 300,000
356
P11–6, Continued
2. Contribution Margin Ratio = Sales – Variable Costs
Sales
3. Break-Even Sales (units) = Margin onContributiUnit
Costs Fixed
=
$2,400,000
$25–$15 = 240,000 units
357
P11–6, Concluded
4.
5. Operating Leverage =
Contribution Margin
Operating Income
=
[400,000 units × ($25 -- $15)]
$1,600,000 = 000,600,1$
000,000,4$ = 2.5
$12,500,000
$10,000,000
$9,900,000
$15,000,000
Break-Even
358
METRIC-BASED ANALYSIS
MBA 11–1
b. The break-even sales (dollars) is determined as follows:
Break-Even Sales (dollars) =
Total Fixed Costs
Contribution Margin Ratio
= $9,180,000
(100% -- 60%)
=
$9,180,000
40%
= $22,950,000
If the margin of safety is 15%, the actual sales are determined as follows:
MBA 11–2
If 1,250,000 units are sold and sales at the break-even point are 1,300,000 units,
there is no margin of safety.
359
MBA 11–3
1. Margin of Safety ($) = Current Sales Dollars – Break-Even Sales Dollars
= $11,003 (million) – $7,347 (million)
= $3,656 (million)
MBA 11–4
1. a. 6,300 game players (31,500 – 25,200)
b. $315,000 (6,300 players × $50)
c. 20% (6,300 players ÷ 31,500 players) or [$315,000 ÷ (31,500 players x $50)]
360
MBA 11–5
1. Margin of Safety (%) = Current Sales Dollars – Break-Even Sales Dollars
Current Sales Dollars
= $98,640,000 – (112,400 units × $246.60)
$98,640,000
=
$98,640,000 – $27,717,840
$98,640,000 = $70,922,160
$98,640,000
= 71.9%
MBA 11–6
1. Estimated unit sales ................................................. 400,000 units
Break-even point in units ......................................... 240,000
Margin of safety......................................................... 160,000 units
3. Margin
of Safety (%)
= Estimated Unit Sales – Break-Even Unit Sales
Estimated Unit Sales
361
CASES
Case 11–1
In an absolute sense, Phil’s actions are devious. He is clearly attempting to use
the first four-year scenario, which is favorable, as a way to market the partner-
ships. They are really longer-term investments. After the first four years, the risk
increases dramatically. The break-even occupancy becomes more difficult to
achieve at 92% than it does at 48%. Focusing on the 48% and remaining silent
about the increase to 92% is deceptive. One might argue “let the buyer beware.”
362
Case 11–2
The airline industry has a high operating leverage. This means that fixed costs
are a large part of the cost structure. The break-even volume is around 66% of
The airline strategy of raising ticket prices and consolidating routes may be a
successful strategy; however, there are a number of considerations. First, the
higher ticket prices would increase the revenue per passenger-mile and reduce
the break-even occupancy percentage only if it is assumed that there is no
change in passenger volume. However, this is unlikely. The revenue from price
The strategy of consolidating routes attacks a major cost of airlines. The number
of flights and terminals served drives fuel and airport ground- and terminal-
related costs. Therefore, consolidating routes by reducing the number of termi-
nals served and/or the number of flights is a method of achieving some econo-
mies of scale. For example, an airline could consolidate three flights departing in
the morning from Tulsa to Dallas into just two flights departing in the morning.
363
Case 11–3
Do-Nothing Strategy:
Revenue – Variable Costs – Fixed Costs = Profit
($75 × 800,000) – ($45 × 800,000) – $24,000,000 = Profit
$60,000,000 – $36,000,000 – $24,000,000 = $0
Thus, 800,000 units is the break-even volume.
Haley’s strategy, which is to maintain the current price but increase advertising
costs, will generate the highest profit.
Case 11–4
The direct labor costs are not variable to the increase in unit volume. The unit
volume is the wrong activity base for direct labor costs. The “number of impres-
sions” is a more accurate reflection of the direct labor cost. An impression is a
separate printing color application on the banners. Thus, the analysis should be
done as follows:
One Two Three Four
Color Color Color Color Total
364
Case 11–5
The Shipping Department manager should respond by pointing out that the activi-
ties performed by his department are related to sales orders and not sales volume.
The orders require inventory pulling and sorting activities as well as paperwork
Case 11–6
There are many possible applications of break-even analysis in a school envi-
ronment. Below are just a few possible ideas.
Break-Even Analysis Revenue Fixed Costs Variable Costs
1. Break-even number of
students in a class
Student tuition for
a class
Faculty salary,
space costs
Supplies, copying
2. Break-even sales in
the bookstore
Book sales Manager’s salary,
space costs
Cashier salaries,
cost of books
3. Break-even daily meal
Meal revenue Salaries, space Food costs
