ACCOUNTING FOR DECISION MAKING

Accounting for Decision Making



Break-Even Analysis

First Strategy

Variable cost = $ 30

Fixed cost = $ 20000000

Price = $ 170.

Break-even Equation; Sales (per scan) = Variable expenses (per scan) + Fixed expenses + Profit

Where n = number of patients170n = 30n + 20000000 + 0170n - 30n = 20000000140n = 20000000n = 20000000/140n = 142857.1429n = 142858

The company will have to sell 142858 units to achieve break even.

Second Strategy

Variable cost = $ 30

Fixed cost = $ 25000000

Price = $ 200.

Break-even Equation; Sales (per scan) = Variable expenses (per scan) + Fixed expenses + Profit

Where n = number of patients200n = 30n + 25000000 + 0200n - 30n = 25000000170n = 25000000n = 25000000/170n = 147058.8235n = 147059

The company will have to sell 147059 units to achieve break even.

The first strategy is to set a selling price of $170 with annual fixed costs at $20,000,000

Income Statements

Variable Costing (contribution)

Units

150000

Sales (150000 x $170)

$25,500,000

Total Variable Costs

4,500,000

Contribution Margin

21,000,000

Total Fixed Costs

20,000,000

Operating Income

$1,000,000

 

 

 

 

 

 

Income Statements

Variable Costing (contribution)

Units

180000

Sales (150000 x $170)

$30,600,000

Total Variable Costs

5,400,000

Contribution Margin

25,200,000

Total Fixed Costs

20,000,000

Operating Income

$5,200,000

 

 

 

 

Income Statements

Variable Costing (contribution)

Units

200000

Sales (150000 x $170)

$34,000,000

Total Variable Costs

6,000,000

Contribution Margin

28,000,000

Total Fixed Costs

20,000,000

Operating Income

$8,000,000

 

 

 

 

The second strategy is to increase spending on advertising and promotions and set a selling price of $200. With the higher selling price the annual fixed costs would increase to $25,000,000.

Income Statements

Variable Costing (contribution)

Units

150000

Sales (150000 x $170)

$30,000,000

Total Variable Costs

4,500,000

Contribution Margin

25,500,000

Total Fixed Costs

25,000,000

Operating Income

$500,000

 

 

 

 

Income Statements

Variable Costing (contribution)

Units

180000

Sales (150000 x $170)

$36,000,000

Total Variable Costs

5,400,000

Contribution Margin

30,600,000

Total Fixed Costs

25,000,000

Operating Income

$5,600,000

 

 

 

 

Income Statements

Variable Costing (contribution)

Units

200000

Sales (150000 x $170)

$40,000,000

Total Variable Costs

6,000,000

Contribution Margin

34,000,000

Total Fixed Costs

25,000,000

Operating Income

$9,000,000

 

 

 

 

The company can achieve the target profit of $4,000,000 at the level of 180000 and 200000 units. The probability of 180000 units is higher; therefore it is more likely the company will achieve the situation.

The company should go ahead with the new product.

Usefulness

Yes this type of analysis can be useful for large projects because break-even point defines what should be the volume of sales to break even venture to work, could cover all its costs, without receiving profit. In turn, both a change in revenue is growing earnings shows operating leverage (operational leverage). Break-even point is of great importance to the issue of the viability of the company and its solvency. Thus, the degree of excess of sales over the break-even point defines the stock of financial strength (stability margin) business (Maskell, 2003). The break-even point of the tools used in ...