Agriculture Reference
In-Depth Information
This increase in variable costs causes breakeven sales to increase:
New Breakeven $12,283,355
Old Breakeven
$11,097,703
Additional Sales $1,185,652
This result shows that if BF&G absorbs the cost increase rather than increasing the selling
prices of their products, the breakeven point will increase by $1,185,652.
Similarly, shrewd purchasing of products or a reduction in manufacturing costs reduces
the cost of goods sold and variable costs. In BF&G's case, an improvement in purchasing
practices which lowered the cost of goods sold by 1 percent would increase the CTO to
11.36 cents, and reduce the breakeven point by $976,911.
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 1136
.
New Breakeven
=
$, ,
10 120 792
As variable costs fall, the breakeven sales also fall:
Old Breakeven $11,097,703
New Breakeven
$10,120,792
Decreased Sales $976,911
The impact of any cost change can be anticipated using these techniques. Managers who are
skillful in the application of volume-cost analysis fi nd it very useful in projecting the prob-
able results of various alternatives before making fi nal decisions. Also, the level of CTO
magnifi es the cost changes dramatically. With a great deal of grain business, BF&G has a
relatively high variable cost and, thus, a small CTO. A little change in costs will make a
dramatic difference in BF&G's breakeven level. For example, when BF&G's variable cost
increased one percent, the breakeven sales level increased about 10.7 percent.
Changes in price
Volume-cost analysis is also very useful in analyzing the impact of changing prices. Since
CTO is selling price per unit less variable cost per unit, then any change in selling price
directly impacts the CTO. Let's assume management of BF&G wants to evaluate a 2 percent
price reduction in an attempt to increase sales. The new breakeven is:
Old CTO
=− =
=− =
1
.
00
.
8964
00
.
1 36
New CTO
0
.
98
0
.
8964
0 0
.
836
As prices fall, CTO falls and breakeven sales increase:
