Agriculture Reference
In-Depth Information
If variable costs are measured in dollars (cents) per unit, then breakeven volume is in units
and is calculated as shown below:
Fixed Costs
Selling Price Per Unit
Breakeven in Units
=
-
Varia
ble Costs Per Unit
In our example, BF&G tracked variable costs as a percent of sales, so CTO is:
CTO
=− = −
SP
VC
1
00
%.
89 64
%.
=
1
0
36
%
Since we are using percentages, in this format SP or selling price is always 100 percent of
selling price or it equals 1.0. So, CTO can be calculated as shown below:
CTO
=− =−
SP
VC
1
.
00
.
8964
=
00
.
1 36
For BF&G, the breakeven sales volume in dollars is:
$,
1 149 722
0 1036
,
=
$,
11 097 702 70
,
.
.
For BF&G, breakeven has been calculated to be sales of $11,097,703. If BF&G generates
sales greater than this amount over the operating period, the fi rm will make a profi t. With
sales above the breakeven level, the contribution margin continues to be generated, but the
fi xed costs have already been covered. Thus, CTO now becomes
CTP (contribution to
profi t)
. The number is the same—10.36 cents—but now this “margin” contributes to profi t
for BF&G.
BF&G's actual sales were $13,410,000. Since actual sales are higher than the calculated
level of breakeven sales, BF&G made a profi t. Given our calculation of CTO, we should be
able to estimate the net operating profi t (including the interest expense as an operating
expense) for BF&G that is illustrated in
Table 12.1.
Actual Sales
$, ,
$,
13 41
0 000
00
−
Breakeven sales
11
97 7 3
,
Sales
above Breakeven
$,
2 312 297
,
×
CTP
.
$,
1 36
239 554
00
The estimate of net income before taxes can be calculated by adding other revenue, $18,200
(
Table 12.1)
, to $239,554, which yields $257,754. The estimated amount is close to the
amount reported on the income statement for the year ending December 31, 2009, $256,550.
Rounding some of the variable cost percent fi gures calculated in
Table 12.2
causes the dif-
ference of $1,204. The important concept here is to understand that as the fi rm generates sales
above the breakeven level, variable costs continue to be paid—these go on forever. Regardless
of the level of sales, BF&G pays 89.64 percent of each sales dollar to variable cost.
