Financial Analysis
Task 4
Competition Bikes
Break Even Analysis
To: Vice President Riley
From: CBI Analyst
RE: Summary report
With CBI now making the CarbonLite and Titanium frame bikes, I was directed to perform a cost study and an activity based costing analysis at the San Diego plant. After extensive research I recommend that CBI use an activity based costing method. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods (Investopia, 2013). Activity costing requires the use of multiple points of data to build a cost point. First, ABC will identify each activity and
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See equations below.
Profit=selling price per unit X quantity sold – VC per unit X quantity sold-total fixed costs =(CM)X quantity sold – fixed costs.
Revenue for Titanium is $900 x $450 = 405,000+ CarbonLite $1495 x 250 = 373,750 =778,750
TVC: Titanium $679 X $450 = 305,550 + CarbonLite $1495 X 250 =373,750 Total=$679,300
TCM: $778,750-$679300= $99,450 for Titanium and using the same formula above TCM for CarbonLite is 27,750. This gives us a combined contribution margin of $127,200.
Some management prefers to view the break even points via a percentage, in which case we would need to derive the contribution margin as a ratio. This would be the unit contribution margin/ unit sales price.
Contribution Margin Ratio: $96,950/$778,750 =.13 Titanium $27,750/679300=.04 CarbonLite
This ratio represents the percent in which the selling price per unit surpasses the VC per unit.
Armed with this knowledge, CBI can now have the figures per unit for which they need to break-even; the break-even being that level of operational activity at which the revenue covers the total cost, but with a zero profit. CVP analyzes the changes in profits in regards to changes in the volume of sales, change in profits, and change in costs. This is
Since our company’s main focus is premium products we will aim for high contribution margins, around 50%, on average, over all five products. After establishing our company brand and products within the market we will look to increase contribution margin to be between 55%-60% over all five products.
8.20 equals $ 86,700. The contribution margin per unit at a retail price of Cr. 6.85 equal 1.95. The required volume will be the result of dividing the profit impact on the contribution margin per unit.
1. For financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?
Because each product has a different contribution margin percentage, the volume required for each break-even point would be different and will not add up to the company’s overall break-even volume of 1,100,000 units; the overall break-even volume assumes that there is only one contribution margin percentage which is :
For 2004, Fixed expenses = 436 (in million €). Also, CM ratio = 653/ 1686 = 0.387
Total Sales Dollars (for covering each incremental dollar of advertising) = $200,000 / $150,000 = $1.33
For example, if the cost to make the paint is $2.75, the profit at $3 would be:
The $320,000, on the other hand, is a fixed cost associated with the proposed addition.
The revenue is $600,600*1.2= $720,720. The variable cost changes as sales increases and fixed cost stays the same, the gross profit is $175,500. After tax, the net income is $100,557.
This method uses simple algebra, and usually focuses on finding the quantity of units that must be manufactured and/or sold, although you may need to find the proper sale price, or less often one of the other variables given instead. The other method for calculating the break-even point is the contribution margin method, which is the same as used by loscostos.info: [Fixed Costs/ (Sales – Variable Costs)] = Break-Even point in units sold. This method will give you how many units to be manufactured to reach zero profit, but can easily be retooled to give the break-even point in revenue. Instead of dividing by the contribution margin, you divide by the contribution margin ratio, which is found by dividing the contribution margin by the sales revenue, which looks like this: (Sales – Variable Costs) / Sales = Contribution Margin Ratio. Calculating the Break-Even point with this method results in this formula: [Fixed Costs / ((Sales – Variable Costs) / Sales)] = Break-Even point in dollars. Finding the Break-Even point in either respect is useful because it tells a company the bottom line in how much product they must sell or how much they must sell their product for in order to cover their expenses. Finding a Target Profit with these equations is as easy as adding your target to the end of the equation or in the
As, in this case study as the total revenue is $22,500,000 and the total events is 5000 events therefore revenue per event is $4,500 ($22,500,000/5000), therefore, the contribution margin per event is $1,900 ($4,500 - $2,600) and as the contribution margin ratio is contribution margin/revenue; therefore the contribution margin in this case is 42% ($1,900/$4,500).
Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs
As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.
Break Even Point in Units = (Total Fixed Costs + Target Profit) ÷ Contribution Margin
When sales volume increases, Company X will have a higher percentage increase in profit than Company Y. Company X's higher proportion of fixed costs gives the firm a higher operating leverage factor. The company's percentage increase in profit can be found by multiplying the percentage increase in sales volume by the firm's operating leverage factor. The sales mix of a multiproduct organization is the relative proportion of sales of its products. The weighted-average unit contribution margin is the average of the unit contribution margins for a firm's several products, with each product's contribution margin weighted by the relative proportion of that product's sales.