ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Cost Accounting Videos 27 videos
What is a Cost: Cost Versus Expense? Cost and expense are pretty similar terms when looking at traditional definitions but they’re a little diffe...
How can unit fixed costs mislead the misled? Unit fixed costs can be misleading because the fixed cost per unit decreases as production increases;...
What is Differential Analysis? Differential analysis is a strategy used to make the best decision. Possible choices are compared to determine which...
Cost Accounting: How Do you Find Volume Based Breakeven Points or Margins in CVP? 7 Views
Share It!
Description:
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.
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
Full Transcript
- 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
Related Videos
GED Social Studies 1.1 Civics and Government
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...