Explanation of the Topic...
|Part 1||Introduction to Break-even Point, Expense Behavior, Revenues or Sales|
|Part 2||Contribution Margin, Break-even Point in Units|
|Part 3||Desired Profit in Units, Break-even Point in Sales Dollars, Desired Profit in Sales Dollars.|
An important term used with break-even point or break-even analysis is contribution margin. In equation format it is defined as follows:
|Contribution Margin = Revenues – Variable Expenses|
The contribution margin for one unit of product or one unit of service is defined as:
|Contribution Margin per Unit = Revenues per Unit – Variable Expenses per Unit|
At Oil Change Co. the contribution margin per car (or per oil change) is computed as follows:
The contribution margin per car lets you know that after the variable expenses are covered, each car serviced will provide or contribute $15 toward the Oil Change Co.'s fixed expenses of $2,400 per week. After the $2,400 of weekly fixed expenses has been covered the company's profit will increase by $15 per car serviced.
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The break-even point in units for Oil Change Co. is the number of cars it needs to service in order to cover the company's fixed and variable expenses. The break-even point formula is to divide the total amount of fixed costs by the contribution margin per car:
|Break-even Point in Cars per Week = Fixed Expenses per week ÷ Contribution Margin per car|
|Break-even Point in Cars per Week = $2,400 per week ÷ $15 per Car|
|Break-even Point in Cars per Week = 160 Cars per Week|
It's always a good idea to check your calculations. The following schedule confirms that the break-even point is 160 cars per week:
Oil Change Co.
Projected Net Income
For a Week
Sales (160 cars serviced at $24 per car) $ 3,840 Variable expenses (160 cars at $9 per car) – 1,440 Contribution margin 2,400 Fixed expenses – 2,400 Net income
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