Breakeven Quantity of Sales
This video discusses the concept of “Breakeven
Quantity of Sales”. Relevant topics are the “Degree of Operating Leverage”.
The following is a part of the transcript. The video requires flash 8 or higher.
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When we discussed the DOL, we saw
that the “variable cost (VC)” and “fixed cost (FC)” are
the two main characters. The goal of a company is to sell enough quantities so
that it can cover the variable cost as well as the fixed cost, so that it has operating
profit (EBIT).
The quantity the company has to sell
to cover both the VC and FC is called the breakeven quantity. At the breakeven
quantity, the net profit is zero. Therefore,
QxP – Q x VC – FC =0
Q = FC / (P-VC)
This is simple math. I don’t
think you have to memorize. If you use the common sense to write down the 1st
equation during the exam, the chance of making mistake will be less than just
memorizing the 2nd one.
Please refer to the video for more
insights.
Please note that the first question is not correct as there is + sign with FC. It shoud be the following:
QxP – Q x VC – FC =0
second one is correct i.e Q = FC / (P-VC)
Contribution = Fixed price + Profit. So it would be Sales – Variable cost = Fixes cost + Profit.
(Q*Price per unit) -( Q* VCper unit ) = Fixed cost + Profit
Yahsu,
Thanks a lot for pointing out the typo! It’s corrected now.
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