Agriculture Reference
In-Depth Information
Thus, to reach this profi t goal BF&G must generate sales of:
Breakeven Sales 1$,097 7 3
Additional Sales to Reach Profit Goal 2 413
,
0
$,
127
New Total Sales Goal 13,
$
51 800
,
Management now must follow through with a marketing and sales program that will allow
BF&G to reach its profi t goal.
Changes in costs
Volume-cost analysis also helps answer questions about how changes in the cost structure
will affect profi t levels. Suppose, for example, that BF&G is considering the purchase of an
additional truck that costs $50,000. The truck would be depreciated over a fi ve-year period.
The annual fi xed costs for this additional truck, including depreciation, are projected to be
$10,000. Variable operating costs for the new truck should be about the same as the current
truck. With this information, BF&G management can examine the impact that purchasing
this new truck will have on breakeven and profi t.
The breakeven calculation with this new cost information shows that BF&G must
generate additional sales of $96,525 before it is in any better fi nancial position. The truck
purchase, with depreciation over fi ve years, would obligate the fi rm to increase sales by
$96,525 each of the next fi ve years before profi ts improve. The calculation to determine the
additional sales volume needed is:
Additional Fixed
Cost
Additional Sales to Cover New Fixed Costs
=
CTO
$,
.
10 000
0 1036
=
$,
96 525
It is important to note that breakeven does not tell management “what to do.” The breakeven
relationship simply begins to identify how changes (in this case, the addition of a new truck) have
an impact upon the fi rm. To insure good management decision-making when using this tool, it is
imperative that the manager is able to identify the cost changes caused by the new action, in this
case, buying a truck. (We will take a closer look at investment decisions in Chapter 13 .)
Another use of breakeven analysis is to determine the effect of changes in variable costs.
For example, suppose that BF&G's supplier increased the prices paid by BF&G for prod-
ucts, so that the cost of goods sold increased by 1 percentage point, but competition in the
area was so keen that BF&G's management felt it could not increase the selling price of its
products. The result is the CTO is lowered.
FC
=
=
$,
1 149 722
,
VC
89 64
.
%
of Sales or
0
.
8964
Old CTO
=−
1
.
00
00
00
00
.
896
441 6
=
.
Old Breakeven
=
=−
$,
11
97 7 3
,
(
) =
New CTO
1
.
.
8964
+
00
.
1
0.
936
New Breakeven
=
$, ,
12 283 355
 
 
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