ALSARHANI YAHYA1 Analysis of the relationship between the size, cost and profit CH(3)

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Analysis of the relationship between the size , cost and profit

CH(3)

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There are three cases of the results of the business:

1. Revenues> Costs = Profit.

2. Revenues< Costs = Loss.

3. Revenues= Costs = break Even Point.

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Break Even Point:

It is the point when the all revenue = all cost (Revenue – Cost = 0)

For Identify the break even point they are three method:

1. Equation Method.

2. Contribution Margin Method.

3. Graphic Method.

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Equation Method

All Revenue = All Cost

R = C

(N. unit product x P. one unit) = V.C + F.C

(N x P) = (variable cost for unit x number of the unit product)+ F.C

(N XP) = F.C+ (V.C for unit x N) N. unit product: Number of the unit product P. one unit :Price for one unit V.C: Variable cost. F.C: Fixed cost.

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Example

Perjuston Tires company product tires and the company provide this data:

Fixed cost = 100,000 V.C for unit = 50 P. =100

Get the break event point?

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Contribution Margin Method

It is the difference between the price sale for the unit and the variable cost.

This margin will gradually cover the fixed costs to be covered in full

The contribution margin for the unit =price for the unit – variable cost per unit.

We can get the Break Even Point by:

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All Revenue = All Cost R = C(N. unit product x P. one unit) = V.C + F.C(N x P) = (variable cost for unit x number of the unit

product)+ F.C(N XP) - (V.C for unit x N) =F.CN (V.C for unit X P)=F.CN=F.C / (P-V.C for unit)

So N = F.C / contribution margin for the unit

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According to last example :

Perjuston Tires company product tires and the company provide this data:

Fixed cost = 100,000 V.C for unit = 50 P. =100

What is the contribution margin for the unit ?

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Graphic Method

The graph one of the method which help decision-makers to obtain useful information on the change in the volume of activity and the amount of revenue that is determined a break point or profits or avoiding losses expected.

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Target net income

If the administration wants to know what is the amount of sales made a profit (profit target to be achieved Administration)

Before answer this question we should know the target net income formula

Revenue = Fixed cost + Variable cost + target net income

(N. unit product x P. one unit) = V.C + F.C+ T

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(N x P) = (variable cost for unit x number of the unit product)+ F.C + T

So N=F.C+T / (P-V.C for unit)

So N = F.C + T / contribution margin for the unit

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Example

ABC company decided to get profit = 50,000 R.o and the blew is the data from company:

Fixed cost = 80,000 P= 10 per unit Variable cost per unit = 6. What is the Break Even Point and what is the

target net income?

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Margin of Safety

After we are studying Break Even Point to begin making a profit established after a point but if the volume of activity to less than a point meant they were investigating losses and therefore safety margin is a measure of the extent to which could reduce the sales before entering the circle of losses.

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How to calculate the Margin of Safety? Margin Safety =( the size or amount the sales

- (the size or amount the break point sales / =( the size or amount the sales ) x 100

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Multiple Product and Break Even Analysis In the first of this chapter we bring break

event for one item, but actually most of the company product many items , so to get the break even for many product we should follow the blew steps:

1. Calculate the average of sales price for the mixed product :

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The average of sales price = (the price for item A x the A percent from all items) + (the price for item B x the B percent from all items) + ….

2. Calculate the average of V.C per unit for all items:

(V.C for item A x the A percent from all items) + (V.C for item B x the B percent from all items) + ….

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3. Calculate the Margin of profit for all items:

The average of margin of profit =( the average of sales price for the mixed product - the average of V.C per unit for all items).

4. Calculate the Break even for all items

= F.C/ average of margin of profit .

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Example

ABC company are producing 3 items : Orange juice ,Limon juice and Mango juice and in the blew the other data belong to this company:

Product Price per item

V.C per unit The percentage for all items

Orange 8 1 50%

Limon 6 2 30%

Mango 11 4.5 20%

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The fixed cost was 240,0000 for all product. Request: calculated the break even for all

product

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ANSWERS

1. Calculate the average of sales price for the mixed product:

Product Price per unit The percentage for all items

the average of sales price

Orange 8 50% 4

Limon 6 30% 1.8

Mango 11 20% 2.2

the average of sales price

8

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2. Calculate the average of V.C per unit for all items:

Product V.C per unit The percentage for all items

the average of V.C per unit for all items

Orange 1 50% .5

Limon 2 30% .6Mango 4.5 20% .9the average of V.C per unit for all items

2

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3. Calculate the Margin of profit for all items :

=( the average of sales price for the mixed product - the average of V.C per unit for all items).

= 8 – 2 =6

4. Calculate the Break even for all items :

= F.C/ average of margin of profit

=240,000 /6=40,000 unit