[jimmyjimmy12]

I don't know if this is the right area to post but I want to know, based on accounting and cost volume profit the difference between the break even point (where profit is 0) and contribution margin - fixed cost = Profit/Loss. this is not homework.

This is not the answer, but I want to to further define what I'm trying to say.

So I got this question where it asks me to calculate profit and break even point. Here is a example I made.

Selling Price = $2
Variable Cost = $1.50
Units = 250
Fixed cost = $100

calculate Break even point and Net Profit

1) Net Profit
$125 (Contribution Margin) - $100 (Fixed Cost) = $25 profit gain

2) Break even point

$100 (fixed Cost)/ $0.50 (Contribution Margin units) = 200 units for break even units

200 (break even units) * $2 = $400 break even dollars.

So I want to know that since I got the gain on profit what use is the break even calculation? Since break even is what covers the fixed costs and profit is zero. My teacher said that the net profit calculation is just an estimation... didnt understand really. Please someone explain or clarify what my teacher meant to say.

thanks

[ArcSine]

The cost-volume-profit (CVP) analysis and the break-even (BE) analysis are related in the following way: CVP is a line; BE is one point on that line.

The CVP line in your example would be described by this linear equation:

P = 0.5Q - 100

... where P is your net profit; Q is the number of units sold; and when you plug in any given number for Q units sold, the resulting P is your profit at that sales level.

When you let Q = 200 units (your BE level, as you've computed), P = 0. But as you say, that's just one point along the line, and once you know your whole CVP line, isn't that much more useful than just identifying a single point?

Your instincts are good, Luke Skywalker. The CVP line / equation tells you the whole picture; it includes the BE point, but goes way beyond that to describe the whole profits - sales relationship.

I think a big reason for the persistent focus on the BE level is that business owners are always asking the question, "How many units do I have to sell in order to exactly cover my costs?" They understand that above that point, they're in the black, but that single point on the CVP line represents that 'magical' point at which their ink goes from red to black.

I can't speak for your teacher, but here's one possible basis behind his/her comment: In most situations, you'll probably know your fixed costs with some certainty. In turn, that means you'll know your BE point with some certainty. In your example, e.g. it's absolutely true that you'll need to sell 200 units to break even. But above that point, trying to project your profit becomes an exercise in sales forecasting, which involves a lesser degree of certainty. Hence the comment that "...the net profit calculation is just an estimation."

Keep rockin' with it!

[jimmyjimmy12]

Thank you for your answer. I'm not 100% sure but ill be studying back to what you told me because it seems to make sense to me.

[morgaine300]

Over-simplifying the whole thing, even if your know for sure what your sales were in a particular month, any reason not to want to know where break even is? It's still useful information. For one, you can compare to break even. And if costs/price don't change, it's still useful to know it for the future. Once you have break even, you can look at everything else as above and beyond that.

There's also lots of other stuff you can do with it in terms of analyzing possible changes and such.

[ArcSine]

JJ12, I think maybe Morgaine300 picked up on something in your question that I initially didn't tune in on.

I was not saying that once you've calculated the net profit at a single, given sales level, then it's pointless to consider the BE level also.

My point was that once you've modeled or graphed your CVP relationship (what I originally thought you were driving at), you've got the whole picture at your fingertips, including the BE point. That whole CVP line or curve tells a very informative story.

But if you simply calculate expected profit at a particular sales level, and leave it at that, then you're missing out on the bigger picture--not the least of which is the very informative BE point.

[jimmyjimmy12]

Over-simplifying the whole thing, even if your know for sure what your sales were in a particular month, any reason not to want to know where break even is? It's still useful information. For one, you can compare to break even. And if costs/price don't change, it's still useful to know it for the future. Once you have break even, you can look at everything else as above and beyond that.

There's also lots of other stuff you can do with it in terms of analyzing possible changes and such.

What is the difference between calculating the net profit and calculating the break even using the same figures on the same date?

[morgaine300]

By definition, break even has no net profit. So that's the main difference.

I'm not entirely sure what information you're actually looking for. You're saying "calculating" them, but you've already calculated them so you seem to know how to do that.

Can you be more specific?

[jimmyjimmy12]

Sorry, this must be building you a lot of confusion. I don't really know how explain it

So what I want to say is using the given figures that makes profit (for example using my figures) by subtracting contribution margin by fixed cost, I then know whether it's a gain or a loss by subtracting the two. So why would it still ask me to calculate a break even using the same figures that got me profit when break even only means zero profit?

If you still don't understand what I'm trying to say then just ignore it, ill understand sooner or later. Thanks

[morgaine300]

So what i want to say is using the given figures that makes profit (for example using my figures) by subtracting contribution margin by fixed cost, i then know whether its a gain or a loss by subtracting the two. so why would it still ask me to calculate a break even using the same figures that got me profit when break even only means zero profit?

It's not a "gain" or a loss. Net income and gain aren't the same thing.

Anyway -- yeah, I get it. Except it's not asking you to use the 250 units to figure break even. That number's not in that equation:
Fixed costs/(unit sales price - unit variable costs) (contribution margin)
There's no units in that equation. You're solving for the units that will make you break even and not have a profit. The answer of 200 units is less than the units that had the profit, right? So you're leaving out the 250 units you were given when you do the break even part.

Yes, you're using 3 of the same figures (sales, variable & fixed), but you're not using the 250 of sales volume when doing that. The unit sales, unit variable, and the fixed won't change whether you make a profit or not, so those numbers are indeed used for both. But if you carry that through, total sales and total variable will end up changing based on volume.

[ArcSine]

JJ12, even after you've calc'd your net profit at 250 units, it's still useful to know your breakeven point. The BE information tells you how sensitive your net profit is to possible changes in your sales volume.

In this case, you know that sales would have decline by more than 50 units before you moved into loss territory. It also immediately tells you that if your profit would be zeroed out by a decline of 50 units, then an increase of 50 units (from 250 to 300) would double your net profit.

This is 'real-world' useful, because when your sales department gives you their sales forecast, it's helpful to have an idea of how sensitive your profits will be with respect to the inevitable forecasting errors.

Got to run... I thought I heard the swish of a flyswatter...

[jimmyjimmy12]

XD I think I understand now, so what your trying to saying is that since I sold the 250 units and if I goes below 200 units (break even) then ill be back to making zero profit right?

So pretty much like you said the break even is a forecast.

[jimmyjimmy12]

... sorry let me fix something up with what I said..

"XD I think i understand now, so what your trying to sayin is that since i sold the 250 units which is profit and so the 200 units (break even) calculation tells me when i was making zero profit right?"

[morgaine300]

More like where you would make zero profit, not that you ever did. There's nothing saying that ever happened or will happen, or that the 250 units actually ever happened. They're just senerios so that you could utilize the information. It's pretty improbable to exactly break even.

You've got the right idea that 250 gives you profit and 200 is break even. I think you're still a little too hung up into why you want these numbers and you think it's because something did happen this way. It's just information so that you know... it can help you look both at things that actually did happen and at what might happen in the future, and know where things stand and how to make comparisons. And so you can also play what-if.

A simpler example. You make $1000 a month. Your basic bills such as rent, utilities, groceries, etc. add up to $800. So you know that you have $200 to spare for some other things you may want or need. If you spend exactly $200 then you will have broken even for the month. If you only spent $150, then you'll have a "profit" of $50.

It doesn't mean that you'll spend $200, or $150. It means you now know where you stand in your finances, so that when you're trying to decide things, you know you've got that $200. If your income and main bills don't change, then this remains true month after month. You can also play what-if. What if your rent goes up $50? Now you'll break even if you spend $150. Etc. It's information.

Not exactly the same thing, but just using it as an example to see if you get the idea that it's just information that is useful to you.

[morgaine300]

Perhaps we need to plaster a CVP graph into here. :-)

[jimmyjimmy12]

Thank you for your help I appreciate it, I have gained more understanding from this than I would reading those useless books that don't explain these sort of things (those books always make me wonder deeper), I will use this sort of information on my exams if they come up.

[morgaine300]

Textbooks seem to be written from the point of view that everyone actually understands everything the first time. :-)

[jimmyjimmy12]

Textbooks seem to be written from the point of view that everyone actually understands everything the first time. :-)

I wish the work given to me were like those, actually I wouldn't consider my books as a text book because they are years old 50-70 pages of work put into a plastic bag for us to buy and bine fold it (a different book for each term). The information on those work are sometimes misleading and wrong, even my teacher agrees. But there are still useful information which I can understand from the writters point of view. I think its better to gain some knowledge from it than nothing so yeah...