Академический Документы
Профессиональный Документы
Культура Документы
Total variable and fixed costs are compared with sales revenue in order to determine the level of
sales volume, sales value or production at which the business makes neither a profit nor a
loss (the "break-even point").
In its simplest form, the break-even chart is a graphical representation of costs at various levels
of activity shown on the same chart as the variation of income (or sales, revenue) with the same
variation in activity. The point at which neither profit nor loss is made is known as the "break-
even point" and is represented on the chart below by the intersection of the two lines:
In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As output
increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At
low levels of output, Costs are greater than Income. At the point of intersection, P, costs are
exactly equal to income, and hence neither profit nor loss is made.
Fixed Costs
Fixed costs are those business costs that are not directly related to the level of production or
output. In other words, even if the business has a zero output or high output, the level of fixed
costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of
investment in production capacity (e.g. adding a new factory unit) or through the growth in
overheads required to support a larger, more complex business.
Variable Costs
Variable costs are those costs which vary directly with the level of output. They represent
payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs
such as commission.
A distinction is often made between "Direct" variable costs and "Indirect" variable costs.
Direct variable costs are those which can be directly attributable to the production of a particular
product or service and allocated to a particular cost centre. Raw materials and the wages those
working on the production line are good examples.
Indirect variable costs cannot be directly attributable to production but they do vary with output.
These include depreciation (where it is calculated related to output - e.g. machine hours),
maintenance and certain labour costs.
Semi-Variable Costs
Whilst the distinction between fixed and variable costs is a convenient way of categorizing
business costs, in reality there are some costs which are fixed in nature but which increase when
output reaches certain levels. These are largely related to the overall "scale" and/or complexity of
the business. For example, when a business has relatively low levels of output or sales, it may
not require costs associated with functions such as human resource management or a fully-
resourced finance department. However, as the scale of the business grows (e.g. output, number
people employed, number and complexity of transactions) then more resources are required. If
production rises suddenly then some short-term increase in warehousing and/or transport may be
required. In these circumstances, we say that part of the cost is variable and part fixed.
The Break-even Analysis depends on three key assumptions:
Another way to look at it, is that at the break even point each unit you have sold has paid for
itself (cost of goods sold (COGS) or variable costs) and contributed a share toward the total
operating expenses (fixed costs or overheads) for the period.
The break even analysis is critical for any business owner, because you will know exactly when
you begin to make a profit. The break even point is the lowest limit when determining profit
margins. You will know how low a price you can offer, and the effects of discounting on your net
profit.
You can calculate the break even for any period of time – a year, quarter, month, week, day –
just make sure all three estimates relate to the same time period.
The formula used to calculate the number of units for break even:
Number of units= Total fixed costs / (unit selling price minus variable unit cost)
Dollar value = total fixed costs / (1 minus (total variable costs divided by total sales))
Fixed costs are paid whether or not you make any sales and are also known as business
expenses, overheads, outgoings or operating expenses. Fixed costs do not vary in proportion to
sales or production.
Variable costs vary directly with the volume of sales or production and are also known as the
cost of goods sold (COGS), cost of sales, or direct costs of sales.
Some costs are semi-variable, that is, they contain both a fixed component and a variable
component. Semi-variable costs can be incurred without sales, but are affected by volumes of
trade. For example, telephone charges have a fixed line rental component and a call charge
component that will increase with increased sales.
Q = FC / (UP - VC)
Where;
FC = Fixed Costs,
UP = Unit Price
Therefore,
The margin of safety can also be expressed in percentage form. This percentage is obtained
by dividing the margin of safety in dollar terms by total sales. Following equation is used for
this purpose.
MARGIN OF SAFETY----
Margin of safety represents the strength of the business. It enables a business to know what is the
exact amount he/ she has gained or lost and whether they are over or below the breakeven point.
[3]
1.
Breakeven Analysis
- a restaurant manager knowing how many customers he needs to serve per day
to cover his total costs
- a veterinarian knowing the she needs to pregnancy check at least 100 cows
per week to cover her costs
- a greenhouse manager knowing that she needs to sell at least 85% of her
poinsettias during December to cover the costs
- a cattleman knowing that he needs to get at least $95/cwt for his feeder
calves
- a dairyman knowing that he needs to get 200 cwts of milk per cow
- a landscaper knowing that she needs to do 75 jobs per year to justify buying a
tractor versus leasing one.
There are 100s of ways to calculate breakeven points, so there is not one standard
formula that fits all situations. But, in general, the formula is to divide total fixed
costs per unit of time (per year, per month) by the “margin”, or the per-unit profit
(or cost savings). Here are some general breakeven formulas:
Profit = Price/unit x Units – VC/unit x Units – FC
Breakeven Acres Per Year (Owning vs Custom Hiring): Total Fixed Costs/year
Breakeven Weight per animal: Total Fixed Costs of Production per animal
(Price/bushel – VC/bushel)