Consider the following income statement and answer the questions that follow:
Sales (100 units) $200
Variable costs ($.80 ea) 80
Fixed Costs 20
EBIT 100
Interest Expense 30
EBT 70
Income tax 24
Net Income 46
a. What is the firm’s Breakeven Point in units?
b. Draw a breakeven chart for this firm.
To calculate the breakeven point in units, we need to find the number of units at which the firm's net income is zero.
a. The breakeven point in units can be calculated using the formula:
Breakeven Point (in units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
Given information:
Fixed Costs = $20
Selling Price per Unit = $2.00
Variable Cost per Unit = $0.80
Using the formula, we can calculate:
Breakeven Point = $20 / ($2.00 - $0.80)
Breakeven Point = $20 / $1.20
Breakeven Point = 16.67 units (rounded to the nearest whole number)
Therefore, the firm's breakeven point in units is 17.
b. To draw a breakeven chart, we need to plot the total revenue, total costs, and the breakeven point on a graph.
Let's assume the x-axis represents the number of units sold and the y-axis represents the financial values.
Total Revenue = Selling Price per Unit * Number of Units Sold
Total Costs = Fixed Costs + (Variable Cost per Unit * Number of Units Sold)
The breakeven point is the point where Total Revenue equals Total Costs.
In this case, we can plot the following points on the graph:
Number of Units Sold Total Revenue Total Costs
0 0 20
17 34 39.6
The breakeven chart would have a horizontal line representing Total Revenue starting from (0, 0) and moving in a positive direction, intersecting the Total Costs line at (17, 39.6).
Please note that the chart will have more points and lines beyond the breakeven point, but these are the main points required for breakeven analysis.
To calculate the firm's breakeven point in units, we need to determine at what level of sales the company will neither make a profit nor incur a loss.
a. Breakeven Point in units:
To calculate the breakeven point in units, we need to determine the contribution margin per unit. The contribution margin is the amount left after deducting the variable costs from the sales.
Contribution margin per unit = Sales per unit - Variable costs per unit
In this case:
Sales per unit = $200 / 100 units = $2
Variable costs per unit = $0.80
Contribution margin per unit = $2 - $0.80 = $1.20
Now, to find the breakeven point in units, divide the fixed costs by the contribution margin per unit:
Breakeven Point (in units) = Fixed Costs / Contribution Margin per unit
Breakeven Point (in units) = $20 / $1.20 = 16.67 units
Therefore, the firm's breakeven point in units is approximately 16.67 units.
b. Break-even chart:
To draw a break-even chart, we need to plot the sales, costs, and profit (or loss) at different levels of units sold.
First, we'll plot the sales line, which is a straight line starting from the origin and passing through the total sales point ($200) when 100 units are sold.
Next, we'll plot the total variable costs line, which is a straight line starting from the origin and passing through the total variable costs point ($80) when 100 units are sold.
The fixed costs line is a horizontal line parallel to the x-axis, passing through the total fixed costs point ($20).
The profit (or loss) line starts from the fixed costs point and represents the difference between sales and all costs (variable and fixed costs) at different levels of units sold.
The breakeven point is where the profit (or loss) line intersects the x-axis.
Please note that I am unable to visually draw the chart in this text format. I suggest using a spreadsheet program or graphical software to draw the chart efficiently.