Your Turn: Breakeven Analysis Company A

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From the course by University of Virginia

Managerial Accounting Fundamentals

29 ratings

University of Virginia

Managerial Accounting Fundamentals

29 ratings

This course will teach you the fundamentals of managerial accounting including how to navigate the financial and related information managers need to help them make decisions. You'll learn about cost behavior and cost allocation systems, how to conduct cost-volume-profit analysis, and how to determine if costs and benefits are relevant to your decisions. By the end of this course, you will be able to: - Describe different types of costs and how they are represented graphically; - Conduct cost-volume-profit analyses to answer questions around breaking even and generating profit; - Calculate and allocate overhead rates within both traditional and activity-based cost allocation systems; - Distinguish costs and benefits that are relevant from those that are irrelevant for a given management decision; - Determine a reasonable course of action, given the financial impact, for a given management decision.

From the lesson

COST-VOLUME-PROFIT ANALYSIS

Now that we've learned the fundamentals of cost behavior, we're ready to move on to discussing the relationships between cost structure, volume, price, and profit. We'll then see why these relationships matter as we conduct cost-volume-profit analyses to answer questions around breaking even and generating profit.

Week 2 Overview0:48

What Is CVP Analysis?2:12

Functional Versus Contribution Margin Income Statements4:24

Breakeven Analysis4:52

Your Turn: Breakeven Analysis Company A2:39

Your Turn: Breakeven Analysis Company B1:52

Your Turn: Breakeven Analysis Company C2:13

Your Turn: Breakeven Analysis Company D3:07

Interested in Doing More than Breakeven?3:33

Your Turn: Doing More than Breakeven Company A3:12

Your Turn: Doing More than Breakeven Company B3:05

Your Turn: Doing More than Breakeven Company C2:59

Your Turn: Doing More than Breakeven Company D2:58

CVP Analysis with Multiple Products5:18

Your Turn: CVP Analysis with Multiple Products6:33

Meet the Instructors

Luann J. Lynch
Almand R. Coleman Professor of Business Administration
Darden School of Business

Now it's your turn.

I'm going to give you the opportunity to determine break even quantity and

break even price.

How exciting!

Let's start with break even quantity.

Our first example, Company A sells a product whose price per unit is $1,000,

variable cost per unit are $600, and total fixed cost for the year are $1 million.

How many units must the company sell to break even?

Take a few minutes, give it a try, and then come back, and we'll see how you did.

And I'll meet you at the light board.

How did your turn go?

Let's take a look and see.

I've got the facts written up here.

We know the price, the variable cost per unit, and the fixed cost for the year.

And I've got our handy profit formula written up here.

Let's take the facts and plug into our handy profit formula and

fill in what we know.

We know revenues is equal to price times the number of units and

we know the price, so let's put that in.

The price times the number of units.

I'm going to use Q for

quantity just make it easier to write than writing number of units.

So the price times the number of units minus, let's see, the variable cost per

unit, $600 times the number of units,

minus $1 million in

fixed cost, is equal to 0, right?

That's what we're looking for, we're looking for the break-even quantity.

The number of units that we need to make to have this equation be equal to 0.

Now just rearrange a little bit.

I'm going to take the 1,000 price and the 600 variable cost,

and I'll multiply that times the quantity.

And that's got to be equal to, I'm going to take this fixed cost

to the other side of the equation so that negative becomes a positive.

So we're still looking for Q here,

and if I move this over to the other side I see that the quantity I'm looking for

will be 1,000,000 divided by this $400 here.

So what I am trying to do is find out how many of these $400 contribution

margin units do I need to sell to be able to cover this $1 million in fixed cost?

Well, that happens to be 2,500 units.

Okay, perfect.

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