Question

Cost behavior and Cost-volume-profit analysis In this discussion, please address the following statements; provole Company and Cheddar Company had the same sales, total costs, and income from operations for the current fiscal year; yet provolone has a lower break-even point than Cheddar. Explain the reason. Assuming Gouda is above the break-even point, what will happen for each unit sale? What are the areas that the company should focus on to ensure that they exceed their break-even points on a consistent year-to-year basis?

Answer 1

Let us create an example

		Provole	Cheddar
	Sales	$      500,000	$ 500,000
A	Variable Costs	$      200,000	$ 300,000
	Contribution	$      300,000	$ 200,000
B	Fixed Costs	$      150,000	$   50,000
	Income from Operations	$      150,000	$ 150,000
A + B	Total Costs	$      350,000	$ 350,000
	Breakeven	5,000	2,500

The formula for breakeven is Fixed Costs / Contribution per unit

So even if the total costs are same the breakeven point is different since the fixed costs are different.

At breakeven point a company is at a no profit no loss. So any sale above that will yield in Income from operations. Each unit sale will add to the Net Income.

In order to exceed the break even point on a consistent year to year basis, a company should

1. Try to increase the contribution margin
2. Try to reduce the fixed costs
3. Try to reduce the variable costs