The basis break-even equation
Break-even point = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
The basis breakeven equation expanded to include indirect costs and desired profit?
Breakeven dollar value needed before net profit = Overhead expenses/ (1 – (Cost of Goods Sold / Total Sales)) ( Franklin, Graybeal & Cooper, 2019).
Step-fixed costs refers to fixed costs that can be charged to activities between a particular minimum and maximum threshold beyond which the cost will change and not proportionately. These boundaries, the minimum and maximum threshold, cover a range within which the fixed cost can be applied and this is what is referred to as relevant range ( Hansen, Mowen & Guan, 2007). For any activity, the fixed costs will be assigned to a particular range and any movement beyond that range calls for the next step of fixed costs regardless of how disproportionate it seems e.g. the standard showroom for a car dealer will hold 0-50 cars and cost $5000. If the dealer has 52 cars, he will be forced to go for the next bigger showroom that can hold upto 90 cars and costs $8,500. It does not matter if he will fill this bigger showroom or not.
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Product margins are a good indicator of the profit potential of a service or product. Different industries may have different average product margins with luxury goods and services having high margins while fast-moving consumables have low margins. However, regardless of which category a service falls into, consistent zero or negative net margins are a good indicator of when a service needs to be dropped ( CI Staff, 2011). This position is further strengthened if the factors leading to the negative margins are beyond the company’s control e.g. high fixed costs. Product margins above zero and with indications of rising are a good indicator to keep a service.
Determine her current and predicted: 1) revenues, 2) variable costs, and 3) total contribution margin. What do you recommend she do? Why?
Variable costs = $1500 for supplies which cater for 150 patients. This cost will change with the number of patients thus is variable.
Variable cost per unit = 1500/150 = $10
10% of 150 patients is 15 patients so she expects to see 135 patients at the new price of 450+65 = $515
Current Predicted
Patient Nos 150 135
Cost/ patient 450 515
Total Revenues 67,500 69525
Less:
Variable Costs 1,500 1350 (135*10)
Contribution 66,000 68175
I would advise her to implement the price increase as it would see her earning more revenues despite the slight drop in patient numbers and also reduce her costs thus a higher contribution than what she gets currently.
Determine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why?
Current Prediction
Tests 10,000 11,500 (115% of 10000)
Cost per test 10 8 (80% of initial $10)
Revenue 100,000 92,000
Less: Variable costs 7000 8,050 (11500x0.7V.C per test)
(V.C per test=7000/10000=0.7)
Contribution 93,000 83950
Less: Fixed costs 3000 3000
Net income 90,000 80,950
It is not advisable for Janet to lower her price by 20% to raise her tests by 15% and should therefore maintain her current structure. This is because it leads to a loss of revenue and an increase in variable costs resulting in a subsequent dip in the contribution and net income realized.
What is the daily contribution margin of each non-private pay resident?
Contribution margin = sales – variable cost = 100 – 25 = $75
If 25 percent of the residents are non-private pay, what will shady Rest charge the private pay patients in order to break even?
If 100 = 75%, 25% =?
= 25*100/75 = 34 non private pay residents
Each non-private pay contributes $75 so contribution (NPPC)= 75*34*365days = $903,750.
Private pay variable costs (PPVC) = 100*25*365= $912,500
Break-even costs = PPVC+TFC-NPPC
= 912500+4562500-903750 = $4,571,250
Break Even charge for Private pay = 4571250/365/100 = $125.24
What if non-private pay payors cover 50 percent of the residents?
50% = 100 non-private pay residents
Contribution = 75*100*365 = $2,737,500
PPVC = $912,500
Break even costs = 912500+4562500-2737500 = 2737500
Break-even charge for Private pay = 2737500/365/100 = $75
Total revenue = Break-even costs + profit = 4571250+80000 = 4651250
Private pay charge = 4651250/365/100 = $127.43
Change in pay = 127.43 – 125.24 = $2.19
References
CI Staff (2011). Profit Margin Analysis. AAII. https://www.aaii.com/journal/article/profit-margin-analysis?
Franklin M., Graybeal P & Cooper d. (2019). Principles of Accounting Volume 2 - Managerial Accounting . 12 th Media Services
Hansen D., Mowen M. & Guan L. (2007). Cost Management: Accounting and Control. Cengage Learning
