11 break even

8/4/2019 11 Break Even

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Copyright, 2008, JaxWorks, All Rights Reserved.


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Sales (1000 CDs @ $10) $10,000

Less: Costs associated with production:

Employee costs (1000 CDs @ $0.50): $500

Materials costs (1000 CDs @ $5): $5,000

Packaging costs (1000 CDs @ $1): $1,000

Total variable costs: $6,500

Contribution margin: $3,500

Calculating The Contribution Margin - Figure 1


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CDs Sold: 4510

Sales @ $10 per CD #NAME?

Less: Variable costs of production:

Employee costs (semi-variable): #NAME?

Materials costs (variable) #NAME?

Packaging costs (variable) #NAME?

Total variable costs: #NAME?

Contribution margin: #NAME?

Contribution Margin Analysis - Figure 2


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Employee cost calculation Employee costCDsMade UnitCost per quantity

0 $0.50 #NAME?1000 $0.60 #NAME?2000 $0.70 #NAME?3000 $0.80 #NAME?4000 $0.90 #NAME?5000 $1.00 #NAME?

MaterialsCost: $5.00

PackagingCost: $1.00

Per


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CDs Sold #####Total Per Unit % of Margin

Sales (CDs @ $10 each) #NAME? $10.00 100.00%

Less:Labor (CDs at semi-variable per CD) #NAME? #NAME? #NAME?

Materials (CDs at $5 per CD) #NAME? $5.00 50.00%Packaging costs @ $1 per CD #NAME? $1.00 10.00%

Contribution Margin #NAME? #NAME? #NAME?

CDs Sold 5510Total Per Unit % of Margin

Sales (CDs @ $10 each) $55,100.00 $10.00 100.00%

Less:Labor (CDs at semi-variable per CD) #NAME? #NAME? #NAME?

Materials (CDs at $5 per CD) $27,550.00 $5.00 50.00%Packaging costs @ $1 per CD $5,510.00 $1.00 10.00%

Contribution Margin #NAME? #NAME? #NAME?

Unit and Percent of Sales Contribution Analysis - Figur


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Total Per unitSales $2,000 $20

Less:Materials $400 $4

Labor $900 $9Variable Overhead $300 $3

Contribution margin: $400 $4

Quantity Sold or Produced 100

Operating Income Statement - Figure


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Percent of margin100% Sales

Less:20% Material45% Labor15% Variable Overhead20% Contribution margin:

Quantity Sold or Produced

Excel Formulas for Operating Income


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Total Per unit Percent of marginAN16*AO8 $20 100%

$AN$16*AO10 $4 AO10/$AO$8$AN$16*AO11 $9 AO11/$AO$8$AN$16*AO12 $3 AO12/$AO$8AN8-SUM(AN10:AN12) AO8-SUM(AO10:AO12) AO13/$AO$8

100

Statement - Figure 5


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Fixed costs Sales price Variable cost50 20 15

Using Goal Seeker to Find Break-Even - Figure 6


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Break-Even units Volume (units) Fixed Costs10 1 $50

2 $503 $504 $505 $506 $507 $508 $509 $50

10 $50

Fixed Costs - Figure 7


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Volume (units) Variable Costs1 $15

2 $303 $454 $605 $756 $907 $1058 $1209 $135

10 $150

Variable Costs - Figure 8


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Volume Fixed(units) Costs

1 $502 $503 $504 $505 $506 $507 $508 $50

9 $5010 $5011 $5012 $50

13 $5014 $50

15 $5016 $5017 $5018 $5019 $50

The Classic Break-Eve


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Variable Total TotalCosts Costs Sales

$15 $65 $20$30 $80 $40$45 $95 $60$60 $110 $80$75 $125 $100$90 $140 $120

$105 $155 $140$120 $170 $160

$135 $185 $180$150 $200 $200$165 $215 $220$180 $230 $240

$195 $245 $260$210 $260 $280

$225 $275 $300$240 $290 $320$255 $305 $340$270 $320 $360$285 $335 $380

Point Chart - Figure


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Sales Price per Unit = $20Volume (units) Discount Revenue

5 0.0% $10010 2.5% $19515 5.0% $28520 7.5% $37025 10.0% $45030 12.5% $52535 15.0% $59540 17.5% $660

45 20.0% $72050 22.5% $77555 25.0% $82560 27.5% $870

65 30.0% $91070 32.5% $945

75 35.0% $97580 37.5% $1,00085 40.0% $1,02090 42.5% $1,035

Non-linear Revenue Growth From Giving Discounts - Figu


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re 10 No


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Sales Price per Unit = $20Volume Supplier Variable Sales Contribution

(units) Discount Costs margin5 0.0% $75 $100 $25

10 2.5% $146 $200 $5415 5.0% $214 $300 $8620 7.5% $278 $400 $12325 10.0% $338 $500 $16330 12.5% $394 $600 $20635 15.0% $446 $700 $254

40 17.5% $495 $800 $30545 20.0% $540 $900 $36050 22.5% $581 $1,000 $41955 25.0% $619 $1,100 $481

60 27.5% $653 $1,200 $54865 30.0% $683 $1,300 $618

70 32.5% $709 $1,400 $69175 35.0% $731 $1,500 $76980 37.5% $750 $1,600 $85085 40.0% $765 $1,700 $93590 42.5% $776 $1,800 $1,024

-linear Increases In The Contribution Margin From Purchase Discounts - Figure


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Sal


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Fixed costs = $34,000

8-oz. Per 6-oz. Per 4-oz. PerPackage size Unit Unit UnitSales (units) 10,000 15,000 20,000Sales (dollars) $74,000 $7.40 $94,050 $6.27 $102,600 $5.13

Less variable costs $37,500 $3.75 $50,850 $3.39 $60,600 $3.03(as % of Sales) 51% 54% 59%

Contribution margin $36,500 $3.65 $43,200 $2.88 $42,000 $2.10(as % of Sales) 49% 46% 41%

Sales mix 27% 35% 38%

Break-Even $68,932 $74,021 $83,057

s Mix Analysis - Figure 1


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Fixed costs = $34,000

8-oz. PerTotal Package size Unit

Sales (units) 15,000$270,650 Sales (dollars) $111,000 $7.40

$148,950 Less variable costs $56,250 $3.7555% (as % of Sales) 51%

$121,700 Contribution margin $54,750 $3.6545% (as % of Sales) 49%

100% Sales mix 42%

$75,613 Break-Even $68,932

Redistribution of Sales Mix To Increase Profits - Fig


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6-oz. Per 4-oz. PerUnit Unit Total

20,000 5,000$125,400 $6.27 $25,650 $5.13 $262,050

$67,800 $3.39 $15,150 $3.03 $139,20054% 59% 53%

$57,600 $2.88 $10,500 $2.10 $122,85046% 41% 47%

48% 10% 100%

$74,021 $83,057 $72,525

ure 13 An


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The Classic Break-Even Point Chart - Figure 9


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MONTHS REVENUE

FIXED

COSTS

VARIABLE

COSTS

TOTAL

COSTS

TOTAL

PROFIT X AXIS

0 $0 $170,124 $0 $170,124 -$170,124

1 $80,652 $170,124 $67,183 $237,307 -$156,656 Jan2 $161,303 $170,124 $134,366 $304,490 -$143,187 Feb3 $241,955 $170,124 $201,549 $371,673 -$129,719 Mar

4 $322,606 $170,124 $268,732 $438,856 -$116,250 Apr

5 $403,258 $170,124 $335,915 $506,039 -$102,782 May

6 $483,909 $170,124 $403,099 $573,223 -$89,314 Jun

7 $564,561 $170,124 $470,282 $640,406 -$75,845 Jul

8 $645,212 $170,124 $537,465 $707,589 -$62,377 Aug9 $725,864 $170,124 $604,648 $774,772 -$48,908 Sep

10 $806,515 $170,124 $671,831 $841,955 -$35,440 Oct

11 $887,167 $170,124 $739,014 $909,138 -$21,971 Nov

12 $967,818 $170,124 $806,197 $976,321 -$8,503 Dec

MONTHS REVENUE

FIXED

COSTS

VARIABLE

COSTS

TOTAL

COSTS

TOTAL

PROFIT X AXIS

0 $0 $170,124 $0 $170,124 -$170,124

1 $80,652 $170,124 $58,850 $228,974 -$148,322 Jan

2 $161,303 $170,124 $117,700 $287,824 -$126,521 Feb3 $241,955 $170,124 $176,549 $346,673 -$104,719 Mar

4 $322,606 $170,124 $235,399 $405,523 -$82,917 Apr

5 $403,258 $170,124 $294,249 $464,373 -$61,115 May

6 $483,909 $170,124 $353,099 $523,223 -$39,314 Jun

7 $564,561 $170,124 $411,948 $582,072 -$17,512 Jul

8 $645,212 $170,124 $470,798 $640,922 $4,290 Aug

9 $725,864 $170,124 $529,648 $699,772 $26,092 Sep10 $806,515 $170,124 $588,498 $758,622 $47,894 Oct

11 $887,167 $170,124 $647,347 $817,471 $69,695 Nov

12 $967,818 $170,124 $706,197 $876,321 $91,497 Dec


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Current ProjectedSales $ $967,818 $967,818 Sales $ $967,818

Fixed $ $170,124 $170,124 Fixed $ $170,124

Total Variable $ $806,197 $706,197 Total Variable $ $806,197

Total Variable % 83.30% 72.97%

Profit $ $(8,503) $91,497

Break-Even % 105.26% 65.03%

BE Dollars $1,018,736 $629,342

BE Date Jan 18 Aug 24

Current Pie

Fixed % 17.58%

Total Variable % 83.30%

Profit % (0.88%)

Click Here For Large View

Current BE Chart

THE B/E POINT IS IN NEXT YEAR

BECAUSE PROFIT IS NEGATIVE.



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Sales $ $967,818

Fixed $ $170,124

Total Variable $ $706,197

Projected PieFixed % 17.58%

Total Variable % 72.97%

Profit % 9.45%


Projected BE Chart



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Return To Data Entry


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Current Pie


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Projected Pie


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Of course, there are other considerations ou must take into account. You would

So, o eratin levera e cuts both wa s. A ood decision can increase our rofita

Case Stud : Com arin the De ree of O eratin Levera eFor a more detailed exam le, consider three different s ecialt stores whose o er

Store A has decided to incur the lowest fixed and hi hest variable costs of the th

O eratin income er box: $17.00

If ou can remove the cost of desi n and la out, our total costs will dro from $1

On the other hand, urchasin a com uter and a modem will cost $1,400. This wil

You should base our decision on how de endable our business card orders are

Now su ose that our business card orders are not so de endable. Most of our

If the timin of our investment in the com uter coincides with a dro in orders for

You own a small com an that rints customized reetin cards. At resent, our

One of our em lo ees su ests that, if ou urchase a ersonal com uter and a

You review some recent orders and find that ou aid an em lo ee an avera e of

Variable $0.03 er card for 500 cards = $15.00 Fixed desi n and la out er box = $3.00 Total cost er box: $18.00

You can find lent of exam les of this henomenon in a stack of annual re orts f

The likelihood of ex eriencin these kinds of swin s is one reason that mana ers

An additional conce t that is useful in inter retin the risks due to o eratin lever

Anal zin O eratin Levera eO eratin levera e is the extent to which a firms o erations involve fixed o eratin

Case Stud : Greetin Cards

-

The conce ts of o eratin levera e and financial levera e are ke to an accurate

A firms de ree of financial levera e is the extent to which that firm finances its as

Toda it is almost im ossible for a firm to succeed financiall without usin

However, with increased levera e comes increased risk. If our com an choose


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Store AFixed costs: $20,000.00 Variable costs: $1.50 Unit price:

Units Sold (000) Sales Fixed costs Variable Costs Total Costs

20 #NAME? #NAME? $30,000 #NAME?

50 #NAME? #NAME? $75,000 #NAME?

80 #NAME? #NAME? $120,000 #NAME?

110 #NAME? #NAME? $165,000 #NAME?

140 #NAME? #NAME? $210,000 #NAME?

170 #NAME? #NAME? $255,000 #NAME?

200 #NAME? #NAME? $300,000 #NAME?

Store BFixed costs: $40,000.00 Variable costs: $1.20 Unit price:


20 #NAME? #NAME? $24,000 #NAME?

50 #NAME? #NAME? $60,000 #NAME?

80 #NAME? #NAME? $96,000 #NAME?

110 #NAME? #NAME? $132,000 #NAME?

140 #NAME? #NAME? $168,000 #NAME?

170 #NAME? #NAME? $204,000 #NAME?

200 #NAME? #NAME? $240,000 #NAME?

Store B has decided to incur fixed costs that are hi her than that of Store A, but


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Store CFixed costs: $60,000.00 Variable costs: $1.00 Unit price:


20 #NAME? #NAME? $20,000 #NAME?

50 #NAME? #NAME? $50,000 #NAME?

80 #NAME? #NAME? $80,000 #NAME?

110 #NAME? #NAME? $110,000 #NAME?

140 #NAME? #NAME? $140,000 #NAME?

170 #NAME? #NAME? $170,000 #NAME?

200 #NAME? #NAME? $200,000 #NAME?

Store A Store B Store C

Fixed costs: $20,000 $40,000 $60,000

Variable costs: $1.50 $1.20 $1.00

Sales price: $2.00 $2.00 $2.00

Store C has decided to incur the hi hest fixed and lowest variable costs of the th

The exam les above dis la an anal sis of each stores sales and Earnin s Befo

The exam les also make some trends evident. These trends are conse uences o

Store A which has the lowest fixed cost and the hi hest er unit cost will break e

Store B, which has fixed costs that fall between Store A and Store B, breaks even

Store C, which has the hi hest fixed costs and the lowest er unit sales cost, brea


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Store A

Units Sold (000) Sales Fixed costs Variable Costs Profits

20 $40,000 $20,000 $30,000 $(10,000)

50 $100,000 $20,000 $75,000 $5,000

80 $160,000 $20,000 $120,000 $20,000

110 $220,000 $20,000 $165,000 $35,000

140 $280,000 $20,000 $210,000 $50,000

170 $340,000 $20,000 $255,000 $65,000

200 $400,000 $20,000 $300,000 $80,000

Store B

20 $40,000 $40,000 $24,000 $(24,000)

50 $100,000 $40,000 $60,000 $0

80 $160,000 $40,000 $96,000 $24,000

110 $220,000 $40,000 $132,000 $48,000

140 $280,000 $40,000 $168,000 $72,000

170 $340,000 $40,000 $204,000 $96,000

200 $400,000 $40,000 $240,000 $120,000

Store C

20 $40,000 $60,000 $20,000 $(40,000)

50 $100,000 $60,000 $50,000 $(10,000)

80 $160,000 $60,000 $80,000 $20,000

110 $220,000 $60,000 $110,000 $50,000

140 $280,000 $60,000 $140,000 $80,000

170 $340,000 $60,000 $170,000 $110,000

200 $400,000 $60,000 $200,000 $140,000

De ree of O eratin Levera e DOLAnother wa to understand how o eratin levera e im acts our com an s rofit

DOL = Units* Price-Variable Cost / Units* Price-Variable Cost -Fixed Cost


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Fixed costs: $20,000 $40,000 $60,000

Variable costs: $1.50 $1.20 $1.00

Sales price: $2.00 $2.00 $2.00

Units Sold

'000 Sales Fixed costs Variable costs

Store A 120 $240,000 $20,000 $180,000

Store A 200 $400,000 $20,000 $300,000

Store B 120 $240,000 $40,000 $144,000

Store B 200 $400,000 $40,000 $240,000

Store C 120 $240,000 $60,000 $120,000

Store C 200 $400,000 $60,000 $200,000


Fixed costs: $20,000 $40,000 $60,000

Variable costs: $1.50 $1.20 $1.00

Sales price: $2.00 $2.00 $2.00

Units Sold

'(000) Sales Fixed costs Variable costs

Store A 200 $400,000 $20,000 $300,000

Store A 120 $240,000 $20,000 $180,000

However, the calculated DOL will be the same on the downside. So for ever decr

Store A, for exam le, has a DOL of 1.5 with unit sales of 120,000:DOL =120 000* 2.00- 1.50 / 120 000* 2.00- 1.50 = 20 000DOL = 1.5

These calculations uantif the data shown in exam le below. The numbers indic

Each store sells the same number of units: 120,000 or 200,000. Each store sells t

Ex ressed in raw dollar amounts, an increase in unit sales from 120,000 to 200,0

or, e uivalentl :DOL = Contribution Mar in/ Contribution Mar in Fixed CostUsin the data for the three s ecialt stores, one can calculate the DOL at the oi


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Store B 200 $400,000 $40,000 $240,000

Store B 120 $240,000 $40,000 $144,000

Store C 200 $400,000 $60,000 $200,000

Store C 120 $240,000 $60,000 $120,000

Units sold per month 20,000 Unit variable costs $0.60

Average unit sales price $2.20 Current fixed costs $10,000

Contribution margin $202,986

DOL 2.45

Fixed Variable

1994 sales month Units Sales costs Costs

January 6,582 $14,480 $10,000 $3,949

February 11,121 $24,466 $10,000 $6,673

March 14,178 $31,192 $10,000 $8,507

April 13,692 $30,122 $10,000 $8,215

May 11,597 $25,513 $10,000 $6,958

June 9,599 $21,118 $10,000 $5,759

July 9,913 $21,809 $10,000 $5,948

August 10,926 $24,037 $10,000 $6,556

September 14,349 $31,568 $10,000 $8,609

October 12,965 $28,523 $10,000 $7,779

November 6,972 $15,338 $10,000 $4,183

December 4,972 $10,938 $10,000 $2,983

Sum:

Standard Deviation:

The DOL ives mana ers a reat deal of information for settin o eratin tar ets

Case Stud : Hot-do SalesHotDo Man is a small business that sells s ecialt coffee drinks at office buildin

The cost of trans ortation to and from the sales area, lus the ower demands of

HotDo Man resentl has fixed costs of $10,000 er month. The lease of a new


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Units sold per month 20,000 Unit variable costs $0.35

Average unit sales price $2.20 Current fixed costs $10,000

Additional monthly lease Contribution margin $234,702

payment, new offices: $2,200 DOL 2.66

Projected fixed costs: $12,200

Fixed Variable

1994 sales month Units Sales costs Costs

January 6,582 $14,480 $12,200 $2,304

February 11,121 $24,466 $12,200 $3,892

March 14,178 $31,192 $12,200 $4,962

April 13,692 $30,122 $12,200 $4,792

May 11,597 $25,513 $12,200 $4,059

June 9,599 $21,118 $12,200 $3,360

July 9,913 $21,809 $12,200 $3,470

August 10,926 $24,037 $12,200 $3,824

September 14,349 $31,568 $12,200 $5,022October 12,965 $28,523 $12,200 $4,538

November 6,972 $15,338 $12,200 $2,440

December 4,972 $10,938 $12,200 $1,740

Sum:

Standard Deviation:

Unit Unit Total Fixed

Sales Price Sales Costs

Our market research leads us to believe that to sell an additional 80,000 units w Neither total fixed costs nor unit variable costs will chan e durin this ear.Based on these assum tions, the chan e in net o eratin income for each firm w

But if HotDo Mans owners fre uentl take rofits out of the business, so that it h

Mana ers can use the DOL to lan not onl their o erations, as was done in the

Variabilit in rofit levels, whether measured as EBIT, o eratin income, or net in

Plannin b Usin the DOLIn Januar for exam le the mana ers of Firms A B and C mi ht set out their an

We want to increase our sales volume from 120,000 to 200,000.

Althou h the lease of new offices would increase the fixed costs, a careful estima

But look at the chan e in the variabilit of the rofit from month to month. From N

The exam le above indicates that b movin some of the ex enses from the cate

This increase in variabilit is reflected in the month-to-month standard deviation ofThe increase in variabilit is also reflected in the HotDo Mans DOL. As shown in

If HotDo Man has lent of mone in the bank to meet unex ected ex enses su


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Firm A 120,000 $2.00 #NAME? $20,000

200,000 $1.70 #NAME? $20,000

Firm B 120,000 $2.00 #NAME? $40,000

200,000 $1.70 #NAME? $40,000

Firm C 120,000 $2.00 #NAME? $60,000

200,000 $1.70 #NAME? $60,000

Total Total Debt

Debt Assets Ratio

Firm A $0 $10,000 0%

Firm B $2,000 $10,000 20%

Firm C $5,000 $10,000 50%

The Debt Ratio measures the ro ortion of a firms total assets that are financed

The ac uisition of additional debt, of course, chan es a com an s de ree of fina

Su ose that ou can obtain a loan at 9 ercent interest to finance the ac uisition

Clearl , financial levera e is an im ortant indicator to investors should I bu this

The ratios rovide mana ers, anal sts, investors, and creditors with useful indicati

Determinin the Debt RatioThe Debt Ratio is the ratio of total debt to total assets. Another term for the Debt

Financial levera e is the extent to which a com an finances the ac uisition of its

In contrast, financial risk is the additional ex osure, above and be ond business ri

Su ose for exam le that ou decide to start a business that offers trainin clas

If ou obtain a loan to finance the urchase of com uter workstations for our clie

It is useful to se arate business from financial risk to make decisions ertainin to

A thorou h understandin of the debt that our com an has assumed si nificantl

As before Firm C has a hi her DOL than either Firms A or B. Althou h the mana

Performin an anal sis of the im acts that levera e can have on a firms rofitabili

Anal zin Financial Levera e


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EBIT Interest Times Interest

Earned

Firm A $200,000 $30,000 6.7

Firm B $200,000 $50,000 4.0

Firm C $200,000 $100,000 2.0

Co ri ht, 2008, Jaxworks, All Ri hts

Determinin the Times Interest Earned RatioTimes Interest Earned refers to the number of times that interest a ments are co

The Times Interest Earned ratios in the exam le indicate that Firm A, because it h

Firm C runs a reater risk of financial difficult than the other two firms. This is be

SummarIn the business environment of the new millennium, o eratin and financial levera

For exam le, a com an s value is in lar e measure a function of the value of its

On the other hand, a com an with a low debt ratio has used its e uit to ac uire

A firms debt ratio is also a useful indicator of how well it will weather difficult finan

In debt ratio exam le, Firm C has the hi hest debt ratio. This im lies that if the fir

The E uit Ratio is the o osite of the Debt Ratio. It returns the ratio of a firms e


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ant to consider how man of our customers have

ilit dramaticall , once ou have broken even on

ations are identical in all res ects, exce t for the

ree stores. It has little in the wa of s ecial

.00 to $15.00 er order and our o eratin income

l introduce a new, fixed cost to the roduction of

. Su ose that ou have a stead stream of

business de ends on the atrona e of one lar e

reetin cards the com uter could sit idle for

variable o eratin costs are $0.03 er card to rint

modem, our customers could send their own

$3.00 er order to do the desi n and la out. So

rom the 1980s. Within that stack ou can find

, anal sts, and stockholders must a l the

e and financial levera e is business risk.

ex enses. Mana ers can define the de ree of

anal sis of a com an s value. A firm is levera ed

sets b borrowin . More s ecificall , financial

some form of levera e. Firms commonl use

to be hi hl levera ed, it must be willin to acce t


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$2.00

Profits

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

$2.00

Profits

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

o kee its variable costs lower than Store A. This


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$2.00

Profits

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

#NAME?

ree. It has invested heavil in e ui ment that not

e Interest and Taxes EBIT for a iven uantit of

f each stores decision as to the relationshi

en faster than Store B and Store C. However

slower than Store A but faster than Store C. Once

ks even more slowl than the other two stores. But


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abilit is b calculatin the De ree of O eratin


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EBIT DOL

$40,000 1.50

$80,000 1.25

$56,000 1.71

$120,000 1.33

$60,000 2.00

$140,000 1.43

EBIT DOL

$80,000 1.25

$40,000 1.50

ease in sales volume, each firms DOL will cause

te that the EBIT of the com anies that have the

hem for the same rice: $2.00 er unit. But

0 means an increase in rofits of $40,000 for

nt where unit sales are 120,000:


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$120,000 1.33

$56,000 1.71

$140,000 1.43

$60,000 2.00

EBIT

$531

$7,794

$12,685

$11,907

$8,555

$5,358

$5,861

$7,482

$12,958

$10,744

$1,155

$(2,045)

$82,986

$4,963

and lannin rofitabilit . For exam le, ou would

s. Each mornin and afternoon, trucks arrive at

the trucks coffee brewin e ui ment, are

ffice, closer to the sales area, would cost an


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EBIT

$(23.30)

$8,374

$14,029

$13,130

$9,254

$5,558

$6,139

$8,013

$14,346$11,785

$698

$(3,002)

$88,302

$5,738

Unit Total Net Increase

variable variable operating in net

costs costs income income

must lower our unit sales rice from $2.00 to

uld be as shown below.

as relativel little in the wa of resources to

otDo Man case stud , but also their net income

ome does not necessaril increase the level of

ual o erations and rofit tar ets b means of the

e of the otential savin s in asoline and vehicle

vember throu h Januar , when it is much more

or of variable costs to that of fixed costs, HotDo

earnin s, which is shown in both exam lesboth exam les, the DOL would increase from 2.45

ch as ma or re airs to its trucks or the trucks


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$1.50 $180,000 #NAME?

$1.50 $300,000 #NAME? $(20,000)

$1.20 $144,000 #NAME?

$1.20 $240,000 #NAME? $4,000

$1.00 $120,000 #NAME?

$1.00 $200,000 #NAME? $20,000

both short-term and lon -term b means of

cial levera e, and therefore new debt can have

of new com uter workstations. If the return on the

tock? , to mana ers will this decision et me a

ions of how financial levera e im acts the level of

Ratio is the Levera e Factor. The exam le below

assets b means of debt: that is, a com an that

sk, that a firm incurs b usin financial levera e:

es in the desi n of business software. Your

ts to use durin trainin , ou have assumed an

financial levera e. One wa to focus on financial

enhances our abilit to make ood decisions

ers of Firm C believe that this works to their

it is essential to a clear icture of the risk a


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Reserved.

vered b a firms earnin s. It is calculated b

as relativel low debt, uses a lower ro ortion of

ause it must cover interest a ments before

e are im ortant in redients in determinin the

ssets. If a firm has a hi h debt ratio, then a hi h

assets. This im lies that it re uires a smaller

cial times. For exam le, if a com an with a hi h

were to ex erience a recessionar eriod, the

uit to its assets. The hi her the E uit Ratio, the


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