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Cost Accounting Videos 27 videos

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Cost Accounting: How Do you Find Volume Based Breakeven Points or Margins in CVP? 7 Views


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How do you find volume based breakeven points or margins in CVP? CVP is cost volume profit analysis and it’s a form of accounting analysis used to make sure a company is making money. It requires finding volume based breakeven points by finding the difference between sales and expenses. The breakeven point means that the sales made have the same value as the company’s expenses for a period of time. So, the breakeven point is when the operating income is zero.

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Transcript

00:00

And finance Allah Shmoop How do you find volume based

00:05

break even point or margins in C v P Or

00:13

like in plain English Where do you break even Like

00:15

at what volume of your products Can you pay your

00:18

rent insurance overhead salary and have just enough left over

00:21

to pay the interest on the loan that grandmama gave

00:24

you to start this embalming company So yeah that's what

00:27

you dio You're an embalmer And here's your embalmer jacket

00:30

for a thousand bucks you stick bodies on this old

00:33

sewing machine like thing and spin Well it's basically masking

00:37

tape around them and then dip them in this woo

00:40

magic fluid No don't look there It's not the secret

00:43

sauce from Jack in the box and boom They're ready

00:46

to be you know put on display Well why do

00:49

people embalm They like the spirituality of it You know

00:53

you do a little ceremony Kind of like the twelfth

00:55

century Viking meets the eighteenth century into it with a

00:59

dash of for millennia ago Egypt thrown in Your parents

01:03

pushed you to have a steady job maybe go to

01:05

law school Something you could really count on once your

01:07

rock and roll career died So you know death and

01:10

taxes and whatever And you were really never very good

01:13

with numbers not a big fan of paying taxes in

01:16

the first place s So here you are You don't

01:18

make much so you don't pay much in taxes anyway

01:21

A customer buying the basic embalming package pays you a

01:24

grand Sometimes it's walk in business Sometimes it's families with

01:28

the you know wheel in business And other times you're

01:31

just in upgrade to a funeral package Thanks in a

01:33

big shot out there to Bob's Holy Roller House of

01:35

Heaven in furniture shop lifesavers Well you outsource most of

01:39

the work piecemeal to Luke Risha Here she charges you

01:43

two hundred bucks for a full wrap old school The

01:45

masking tape costs another eighty bucks and the secret saw

01:49

the magic after life fluidity elixir of blah blah blah

01:53

or whatever you're calling in this week's special Yeah you've

01:56

got to find the newspaper coupon section for the name

01:59

but anyway a gallon of that It's of costs one

02:01

hundred bucks So that's your marginal world You charge a

02:04

grand for costs of two hundred for labor Eighty for

02:06

the tape one hundred for the goop and that's it

02:08

Three eighty and costs six hundred twenty dollars in contribution

02:12

for unit or unit sale The only problem Phil You

02:15

have to refrigerate the clients sometimes for a long time

02:18

until you can all schedule the afterlife party And there's

02:20

always a relative stuck in some meeting or on a

02:23

trip or something So you spend five grand a month

02:26

on rent and then another two grand on electricity and

02:28

maintenance and all the other storage things And yeah it's

02:31

kind of nice to not have to carry life insurance

02:33

anyway Steady state You basically have seven grand to make

02:36

up in volume every month to just break even from

02:39

your operations So how many customers buying the basic thousand

02:43

dollar package do you need Well each customer contributes six

02:46

hundred twenty bucks So thinking aloud here if you had

02:48

ten of them well that had contribute sixty two hundred

02:51

to go again through seven grand and fixed recurring costs

02:54

Right That would get you close Oh the actual number

02:56

Well you just divide seven thousand by six Twenty there

02:59

The revenues by the unit contribution of profits and you

03:02

get eleven point two So really you need a dozen

03:04

customers a month to break even on this plan Because

03:07

you have other expense like a phone line And you

03:09

of course need a little bit extra for you know

03:11

accidents or whatever Although you're thinking well like what worse

03:15

could happen here But it's amazing what goes on here

03:18

at night You had a family of rats break in

03:20

one time in the after life Elixir of Love was

03:23

well a few days ripe And oh it wasn't pretty

03:26

So the Elixir has a formula and it's not just

03:29

mayo ketchup in a dash of Worcestershire Sure sure Shire

03:32

It's way more than that But this calculation has a

03:35

formula too There are a few of them in fact

03:38

and for context You're thinking about opening a chain of

03:40

these places all around the country and the world You

03:43

get cheaper prices on tape and elixir at volume and

03:47

maybe you'll find someone needing less maintenance than Lou Krysia

03:50

you know for less than two hundred bucks per Anyway

03:53

you confined the break even on volume here right You

03:56

need twelve bodies at a grand each or twelve grand

03:59

total to get there So to calculate you took your

04:02

fixed recurring costs of the five grand in Ran into

04:04

grand Electric and other veils Seven grand total and you

04:07

divided it by the unit contribution of six hundred twenty

04:10

dollars And that's how you got the eleven point to

04:12

when we rounded up a body Because well of course

04:15

you can't have a fraction of a body The formula

04:17

break even volume in units equals fixed recurring costs over

04:21

unit contribution Or if you had the contribution margin i

04:25

e The profit margin of your units sale fell You

04:28

could get the answer Here is well that is the

04:30

contribution margin here is six hundred twenty overthe ao or

04:33

sixty two percent nice high margin business So to get

04:36

the break even volume you need on a sales dollars

04:38

basis while you just divide that seven grand figure you're

04:41

fixed recurring overhead by the contribution margin figure and voila

04:45

you get the same number Yes Third grade arithmetic Magic

04:48

So aboutthe loan to start this thing from Grandmama Well

04:52

she's off to a better place now and yeah that's

04:54

her here You still have to pay off that loan

04:57

and you want to make enough profit so you can

04:59

go build another hundred of these stores and really make

05:01

something of this life of yours or the next either

05:05

is fine but you need to get started before you

05:07

run out of time So you've set a target profit

05:10

number for this store for the months going forward of

05:12

four grand big up profit numbers But you also got

05:16

a lot of free press from the you know rat

05:18

incident What they say There's no such thing as bad

05:21

press So you're expecting a lot of customers coming in

05:23

and you already have a load of reservations And you're

05:26

optimistic about your new partnerships with the US Hang Gliding

05:29

Association and the Grand Canyon Motorcycle Jumping Association and the

05:34

Harness List Climbers Association So your target is four grand

05:38

a month in profit Well how do you get there

05:39

Well you can think of a need for profit almost

05:42

like it's just more overhead So today you have five

05:45

grand in rent in two grand in utilities costs and

05:48

everything else for seven grand So you've been thinking of

05:51

yourself as an absentee owner and haven't been taking a

05:54

really salary and you should someday But for now what

05:57

Grandmama left you is tidying things They're covering thing things

06:01

are paying the basics in your life anyway that seven

06:03

grand and fix recurring overhead Then you want four grand

06:06

a month in profits So you think you're a big

06:08

line here as being eleven grand So what's your target

06:12

volume then you know like at a grand a pop

06:15

or a mom or uncle or aunt How many sales

06:18

do you need in a month to hit your target

06:20

profit of four thousand dollars So that's seven thousand fix

06:23

recurring plus the four thousand of profit target That's eleven

06:26

thousand bucks divided by the six hundred twenty dollars of

06:29

contribution per customer And that gets you seventeen point seven

06:33

It will round up to eighteen bodies a month All

06:35

right not that bad A goal that's almost like one

06:38

a day you know like the vitamin which well this

06:40

really pale guy clearly never took a body A week

06:43

day Yeah totally doable is a goal And your target

06:46

sales volume Well take the eleven grand divided by the

06:49

contribution margin of point six two and you have seventeen

06:52

point seven there OK right so same calculation Mohr less

06:56

just flipping around a few numbers So where do things

06:58

get ugly here or uh well uglier What if you

07:01

could raise prices with no diminishing of volumes like Could

07:05

you charge fifteen hundred or two grand for a eternal

07:08

life likeness and bliss Or what if things went the

07:11

other way How sensitive is your pricing or set in

07:14

a very macro micro we can kind of way How

07:16

steep is your demand Curves like Could you charge eight

07:20

hundred dollars and get way more customers And here's another

07:22

thought What if your costs went down with scale like

07:26

if you had ten shops could you get masking tape

07:28

at half the price you're paying Would labor go up

07:31

or down Is Lacresha a kind of one time gift

07:35

Or is she making way more than what really market

07:38

prices are for what you'd have to pay in the

07:41

future to get Mohr embalmers is therein embalmers union Yeah

07:45

Preserve our jobs or we won't preserve anything Or I'd

07:48

like to lodge a formaldehyde complaint like those signs Do

07:52

it well if you make more money the bigger you

07:54

get that it be called operating leverage That is you'd

07:58

have operating leverage if you made more profits The bigger

08:01

you got so yes Yes There's the thinker so much

08:04

Think about so little Actually maybe you have tons of 00:08:08.212 --> [endTime] time to think about it

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