Break-even point example
Company A sells water bottles with its fixed costs consisting of property taxes, executive salaries, and a lease, adding up to $100 000. The variable cost incurred in production of one bottle of water is $2. One water bottle is sold at $12 per unit. The breakeven point of the company will be:
Break even quantity = $100,000 / ($12 – $2) = 10,000
This can be represented in the chart below:
Figure 1: (Sorin & Carmen, 2010)
Interpretation:
The yellow line represents total variable costs and total fixed costs.
The breakeven point is at 10 000 units.
If the number of units exceeds 10000 the company will start making profit on every unit sold.
It is important to note why the revenue line (blue) is greater than the total cost (yellow) after 10000 units. The company is bound to make loss if the number of units decreases below 10000
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Example of contribution calculation
Cost card $ $ $
Sales price 100
Materials 20
Labor 25
Variable overheads 20
Marginal cost 65
Contribution 35
Fixed cost 10
Total absorption cost 75
Profit 25
Using labor services as an example, decreasing the amount of labor decreases marginal cost. Consequently, contribution will be increased and so is the profit. The vice versa is also true. Some services cannot be eliminated due to their level of significance in the production process. However, any elimination has a similar effect as any decrease.
Budget is applied in planning the various business phases: departmental coordination in a firm to for effective control, forecasting income and expenditure and monitoring business performance (Tennent, 2008).
The dimensions of budgeting include:
Main account - used in determining how main account will be used in the chart of account in budgeting.
Item group - used in classifying items into their respective categories.
Business unit/ strategic business uni t- a segment or a logical element of a company, for example, marketing, production or accounting.
Department- a business branch that has to be considered in budgeting.
Cost center- an organizational part in which it is possible to charge cost for the purpose of accounting.
Except for a static budget, a change in all other forms of budget affect the others by either an increase or a decrease. for instance, a change in statistics budgets (that deals with services) will alter the amount budgeted in the master budget and in case there in no more money added within the financial year, all other budgets have to be altered to cater for the increase.
References
Sorin, B., & Carmen, S. (2010). Cost Volume Profit Model, the Break -Even Point and the Decision Making Process in the Hospitality Industry. Annals of the University of Oradea, Economic Science Series, 19(2), 839–845. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=65287364&site=ehost- live
Tennent, J. (2008). The Economist Guide to Financial Management 2nd Edition. London: Economist Books. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=237183&site=ehost- live
