Breakeven Where No Profit No Loss. Cost Meet Up Cost: Variable Cost: Vary With Units Produced Fixed Cost

Breakeven where no profit no loss.
Cost meet up
Cost:
Variable Cost: Vary with units produced
Electricity, Raw Material, labor
Fixed Cost
Fixed with changes in production till certain point
Machinery
Building
Sales = Price per Unit multiply by units sold
CGS Fixed FC
GP
Operating Expenses: VC per unit* units sold
EBIT
No production means no expense but still you

have to pay financing cost which is interest
expense
Leverage
Breakeven analysis
Sales/revenue= operating expenses so there is no profit and no loss
Used to indicate the level of operations necessary to cover all costs and
to evaluate the profitability associated with various levels of sales; also
called cost-volume-profit analysis.
Operating breakeven point
The level of sales necessary to cover all operating costs; the point at which EBIT = $0.
P is Price
Q is no of units sold
VC is Variable cost per unit
Fixed cost means our CGS
Variable cost means operating expenses
So
EBIT =P∗Q−FC−VC∗Q
0=P∗Q−FC−VC∗Q
If we want to find the breakeven point what actually we have to calculate
0=Q( P−VC)−FC
FC=Q( P−VC )
P is price per unit

Q is no of units sold
FC is Fixed cost
VC is Variable cost per unit
Kate Rowland wishes to estimate the number of flower arrangements

she must sell at $24.95 to break even. She has estimated fixed operating
costs of $12,350 per year and variable operating costs of $15.45 per
arrangement. How many flower arrangements must Kate sell to break
even on operating costs?
FC
=Q
( P−VC )
12350
=Q
(24.95−15.45)
12350
=Q
( 9.5)
Q = 1300 arrangements
Leverage:
All those cost, which effects your Net profit, is called leverage
Operating cost: Operating Leverage
Interest:
Leverage
All those cost who must have to be incurred that made an
effect on your profit is called leverage
Financing activities ,like loan preferred stocks

 Expenses incurred during operations like CGS or Operating expenses are called
Operating Cost : Operating Leverage
 Expenses occurred due to financing activities are called Financial Cost: Financial
Leverage
 Add both Operating Leverage and Financial Leverage is called Total Leverage
Net income available to common stock holder divide number of stocks outstanding is equal to
EPS
Operating leverage is concerned with the relationship between the firm’s sales revenue and its
earnings before interest and taxes (EBIT) or operating profits. When costs of operations (such as
cost of goods sold and operating expenses) are largely fixed, small changes in revenue will lead
to much larger changes in EBIT.
When you have 2 or more years of data income statements

DOL its degree of Operating leverage
% change∈EBIT
DOL=
% change∈Sales
% change new –old/ old
(EBIT of 2019- EBIT2018)/ EBIT2018

As the base is sales so we know Sales is basically number of units sold means Q
So DOL at base level Q
When you have
When you have only one year data
Q∗( P−VC)
DOL at base level Q=
Q∗( P−VC )−FC
Find DOL at this Quantity
Find DOL at Breakeven Q point

• Financial leverage is concerned with the relationship between the firm’s EBIT and its common
stock earnings per share (EPS). On the income statement, you can see that the deductions taken
from EBIT to get to EPS include interest, taxes, and preferred dividends. Taxes are clearly
variable, rising and falling with the firm’s profits, but interest expense and preferred dividends
are usually fixed. When these fixed items are large (that is, when the firm has a lot of financial
leverage), small changes in EBIT produce larger changes in EPS.
% chnage ∈EPS
DFL=
% change ∈EBIT
As the base is EBIT so DFL at base level EBIT
When you have only one year data

EBIT
DFL at base level EBIT =
dividend∗1
EBIT −Intrest −(Preffered )
1−Tax
Total Leverage is sum of Operating leverage and financial leverage.
• Total leverage is the combined effect of operating and financial leverage. It is concerned with
the relationship between the firm’s sales revenue and EPS
% chnage ∈ EPS
DTL=
% change ∈Sales
Q ( P−VC )
DTL at base level Q=
dividend∗1
Q ( P−VC )−FC−Intrest −(Preffered )
1−Tax
Sum of DOL at base level and DFL at base level
Total leverage reflects the combined impact of operating and financial leverage on the
firm. High operating leverage and high financial leverage will cause total leverage to be
high. The opposite will also be true. The relationship between operating leverage and
financial leverage is multiplicative rather than additive.
Questions:
1. Rick Polo is considering having a new fuel-saving device

installed in his car. The installed cost of the device is $240
paid up front, plus a monthly fee of $15. He can terminate
use of the device any time without penalty. Rick estimates
that the device will reduce his average monthly gas
consumption by 20%, which, assuming no change in his
monthly mileage, translates into a savings of about $28 per
month. He is planning to keep the car for 2 more years and
wishes to determine whether he should have the device
installed in his car. To assess the financial feasibility of
purchasing the device, Rick calculates the number of
months it will take for him to break even.
FC
Q=
P−VC
240
Q=
28−15
Q=18.46 months
2. Given the price and cost data shown in the accompanying table for each of the three
firms, F, G, and H, answer the questions that follow.
45000
Q= =4000 units
18−6.75
a. What is the operating breakeven point in units for each firm?
b. How would you rank these firms in terms of their risk?
3. Kate Rowland wishes to estimate the number of flower

arrangements she must sell at $24.95 to break even. She has
estimated fixed operating costs of $12,350 per year and variable
operating costs of $15.45 per arrangement. How many flower
arrangements must Kate sell to break even on operating costs?
4. Fine Leather Enterprises sells its single product for $129.00 per
unit. The firm’s fixed operating costs are $473,000 annually, and
its variable operating costs are $86.00 per unit. Find the firm is
operating breakeven point in units.
5. Barry Carter is considering opening a music store. He wants to

estimate the number of CDs he must sell to break even. The CDs
will be sold for $13.98 each, variable operating costs are $10.48
per CD, and annual fixed operating costs are $73,500. Find the
operating breakeven point in number of CDs.
6. Levin Corporation has fixed operating costs of $72,000, variable operating

costs of $6.75 per unit, and a selling price of $9.75 per unit.
a. Calculate the operating breakeven point in units.
b. Compute the degree of operating leverage (DOL) using the following unit sales
levels as a base: 25,000, 30,000, 40,000.
c. Compute the degree of operating leverage at 24,000 units
7. Northwestern Savings and Loan has a current capital structure consisting of

$250,000 of 16% (annual interest) debt and 2,000 shares of common stock.
The firm pays taxes at the rate of 40%.
a. Using EBIT values of $80,000 and $120,000, determine the associated earnings
per share (EPS).
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage
(DFL).
c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual
interest) debt and 3,000 shares of common stock.

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Breakeven where no profit no loss.

No production means no expense but still you

P is price per unit

Kate Rowland wishes to estimate the number of flower arrangements

Financing activities ,like loan preferred stocks

Operating Cost : Operating Leverage

When you have 2 or more years of data income statements

% change new –old/ old

(EBIT of 2019- EBIT2018)/ EBIT2018

When you have only one year data

Find DOL at this Quantity

Find DOL at Breakeven Q point

When you have only one year data

Total Leverage is sum of Operating leverage and financial leverage.

1. Rick Polo is considering having a new fuel-saving device

3. Kate Rowland wishes to estimate the number of flower

5. Barry Carter is considering opening a music store. He wants to

6. Levin Corporation has fixed operating costs of $72,000, variable operating

7. Northwestern Savings and Loan has a current capital structure consisting of

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