 Hello, and welcome to the session in which we would look at the breakeven analysis. What is the breakeven analysis or the breakeven point? The breakeven point is when you're not operating income, your profit equal to zero. It means you have no gain and no loss for a particular period. Well, when would that happen? It's when your revenue equal to your cost. When you account for all your revenue and you have equal cost, guess what? Revenue minus cost or revenue minus expenses equal to zero. Simply put, we can expand this formula by saying sales minus your variable expenses minus your fixed cost equal to your profit. Your profit equal to zero. So simply put, sales is revenue or sales revenue and this is your cost. When those two equal to each other, you have a profit of zero. Now we can express this by saying sales minus variable expenses, remember sales minus your variable expenses equal to your contribution margin. Well contribution margin minus fixed cost. When that's equal to zero, you break even or simply put, another way to look at it is contribution margin equal to fixed cost, whatever sales minus variable expenses. This is equal to 100 and your fixed cost is 100. That's equal to zero. Simply put, your contribution margin equal to your fixed cost, you break even. So there's many ways to look at this, but the most important formula that we're going to be generating, deriving some formulas from is this one here, which is the contribution margin income statement. Now why is break even analysis important? Because for a company they want to know, when do they break even? Because after you break even for every additional unit you sell, you start to make a profit. Let's take a look at an example to illustrate the concept. We're working with Adam Electronics, Adam is selling tablets. Each tablet Adam's selling is for $500. The variable cost per tablet is 300, 500 minus 300 equal to 200 contribution margin per unit. If we take 200 divided by $500 will give us the contribution margin percentage. And in this income statement, contribution margin format income statement, we assume if we sell 400 unit, well, we have sales of $200,000, $300 per variable cost per unit times 400 is 120, 200 minus 120 equal to 80,000, 80,000 of contribution margin minus 80,000 of fixed cost equal to zero. So this is easy basically because all the numbers are given to us. Now how do we find out what is the break even using a formula? Basically this information is giving to us here. Can we derive some formulas or some shortcuts from this contribution margin income statement? Let's assume we want to know how many units do we need to sell to break even? How many units do we need to sell? Well, how many units do we need to sell? What do we need to do? Remember, we need to cover our fixed cost. This is to break even. We need to cover our fixed cost. Well if we need to cover our fixed cost, what is going to help us cover our fixed cost? If this is fixed cost, if this is the fixed cost bucket, we need to have enough profit in this bucket until it's filled. So what contribute to this fixed cost? It's the contribution margin. So each one of those units is $200. So every time we sell a unit, we contribute $200. Simply put, how many $200 do we need to fill this bucket? Well that's easy. If I take my $80,000 divided by $200, it looks like I need 400 units. Well I need to sell 400 units. So to find the break even point in terms of quantity unit, I need to cover my fixed cost. So if I take my fixed cost divided by my fixed cost by the unit contribution margin. Simply put, I'm dividing by the unit contribution margin per unit, which is $200. I will find my break even per unit. It's quantity. So if I want to find out how many tablets I need to sell, well, I need to cover my fixed cost. How many tablets do I need to sell? Well think about it. To sell enough tablets, I need to cover $80,000. Each tablet is giving me $200 in contribution margin. How many $200 I need? I need 400. And if you want to prove it, you could always complete your contribution margin income statement. So that's one way to find the break even in terms of unit, which is quantity. Also sometimes you want to find your break even point in terms of sales. What is the sales needed? Now obviously once you find the unit, it's easy to find the sales. If you find the unit, you multiply this by 500. It will give you $200,000. But let's assume you don't have the quantity, but you want to find the sales. How do you find the sales? Well let's think about it. You need enough sales. We don't know what sales is. We're going to say sales acts. We know for every dollar in sales you make 40%. So sales times 0.4, okay, sales times 0.4 equal to, should equal to 80,000. Why 80,000? 80,000 is the fixed cost. You need to cover your fixed cost. We know the fixed cost. Well let's solve this formula. If sales, which is we don't know, but sales, from sales we can keep 40% profit. Well we can say x equal to 80,000 divided by 0.4, or what I did is I divided both sides by 0.4, simply put x equal to 200,000. Simply put the formula is you take your fixed cost divided by the contribution margin percentage. And I just showed you why we use the contribution margin percentage. Basically for every sales I make a certain profit. From that profit I need enough to cover 80,000. Simply put, sold for sales, x, x equal to fixed cost divided by the contribution margin percentage. Remember the contribution margin percentage, when you use the percentage in the denominator, you are finding the dollar amount. So when you use the dollar amount, which is the contribution margin per unit, you're finding the quantity. When in the denominator you are using the contribution margin percentage, you are finding the dollar. Notice the numerator is the same, which is 80,000 dollars. So this is the formula on how to compute the breakeven analysis. Now the best way is to see this formula in a form of an example to see if you can apply it. But before we look at an example, I would like to remind you whether you are a student or a CPA candidate, and most likely that's who you are. That's why you are watching. Please take a look at my website, farhatlectures.com. I can help you with your accounting courses. I can help you with your CPA review courses. I don't replace your CPA review courses. What I do is I provide you additional resources, lectures, multiple choice, true, false, exercises that's going to help you do better. If you have not connected with me on social media, please do so. LinkedIn, connect with me on YouTube, like this recording, share it with other Instagram, Facebook, Twitter, Reddit, and my CPA exam support group on group me. Let's take a look at this example to illustrate the concept. Calculate the breakeven point in unit sales. So here we are asked to compute the unit sales for a company that has below contribution margin format income statement, the below contribution margin right here. Sales, $50,000 in sales, variable expenses, contribution margin, fixed expenses, and net operating income. So here we want to know what do we need to do? Simply put, how many units do we need to sell to make this number go down to zero? Now we know it's going to be less than a thousand, right? So but all these are less than a thousand. So how do we solve this problem? Well, there's more than one way to do it. Remember we can use the contribution margin per unit. So we need to cover our fixed expenses. So our fixed expenses are $14,000. If we take fixed expenses divided by the contribution margin per unit, we should get this answer. But hold on a second. I am not giving the contribution margin per unit. Well although it's not giving, you should be able to derive this information. How do I derive this information? If I sold 100 units for $50,000, it means if I take $50,000 divided by $1,000, my selling price is $50. I'm selling each unit for $50. If my variable expense in total is $32,500 for $1,000 unit, well $32,500 divided by $1,000 unit, my variable cost per unit is $32.50. Now I can take $50, my selling price minus the variable cost will give me a contribution margin of $17.50. Now if I take $14,000 divided by $17.50, let's do that, $14,000 divided by $17.50, it's going to give me $800 unit. $800 unit is what I needed. Now once I find the $800 unit, well now I can basically prove it to myself if I want to, which I will, so if I take $800 units times $50, let's do the math, $800 unit times $50, that's going to give me sales of $40,000, $800 units times $32.50, that's going to give me variable expense of $26,000, $40,000 minus $26,000 equal to $14,000 minus $14,000 of fixed cost gave me my break even point of $0. What should you do now? 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