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Break Even and Leverage (Note: Substantial Deviations from the Book)

Break Even and Leverage (Note: Substantial Deviations from the Book). Break Even Point. Value of sales at which: Total Revenues = Total Operating Costs or EBIT = 0. Q* = S* = PQ* =. Break Even Point. Fixed operating costs $60,000

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Break Even and Leverage (Note: Substantial Deviations from the Book)

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  1. Break Even and Leverage(Note: Substantial Deviations from the Book) Breakeven and Leverage

  2. Break Even Point Value of sales at which: Total Revenues = Total Operating Costs or EBIT = 0 Q* = S* = PQ* = Breakeven and Leverage

  3. Break Even Point Fixed operating costs $60,000 Variable costs per unit $0.80 Sales price per unit $2.00 Find the break even point. Q* = $60,000/$1.20 = 50,000 units S* = $2.00 X 50,000 = $100,000 Breakeven and Leverage

  4. Volume-Cost-Profit Analysis: Leveraged Firm Total Operating Units Variable Fixed Total Total Income Sold Costs Costs Costs Revenue (Loss) 0 0 $ 60,000 $ 60,000 0 $ (60,000) 20,000 $ 16,000 60,000 76,000 $ 40,000 (36,000) 40,000 32,000 60,000 92,000 80,000 (12,000) 50,000 40,000 60,000 100,000 100,000 0 60,000 48,000 60,000 108,000 120,000 12,000 80,000 64,000 60,000 124,000 160,000 36,000 100,000 80,000 60,000 140,000 200,000 60,000 Breakeven and Leverage

  5. Break Even Chart: Leveraged Firm Total Revenue • Revenues and costs ($ thousands) • 200 • 160 • 120 • 100 • 60 • 20 40 50 60 80 100 120 Profit Total Costs BE Variable Costs Loss Fixed Operating Costs Units produced and sold (thousands) Fixed costs ($60,000) Price ($2) Variable costs per unit ($0.80) Breakeven and Leverage

  6. Volume-Cost-Profit Analysis: Conservative Firm (Variable Costs Per Unit = $1.60) Total Operating Units Variable Fixed Total Total Income Sold Costs Costs Costs Revenue (Loss) • 0 0 12,000 12,000 0 (12,000) • 20,000 32,000 12,000 44,000 40,000 (4,000) 30,000 48,000 12,000 60,000 60,000 0 40,000 64,000 12,000 76,000 80,000 4,000 60,000 96,000 12,000 108,000 120,000 12,000 80,000 128,000 12,000 140,000 160,000 20,000 • 100,000 160,000 12,000 172,000 200,000 28,000 $ $ $ $ $ Breakeven and Leverage

  7. Total revenue • Revenues and costs ($ thousands) • 200 • 160 • 120 • 80 • 40 • 20 40 60 80 100 Profit Total costs BE Variable costs Loss Fixed costs Units produced and sold (thousands) Fixed costs ($12,000) Price ($2) Variable costs per unit ($1.60) Break Even Chart: Conservative Firm Breakeven and Leverage

  8. Operating Income or Loss Leveraged Conservative Units Firm Firm 0$(60,000) $(12,000) 20,000(36,000) (4,000) 40,000(12,000)4,000 60,00012,000 12,000 80,00036,000 20,000 100,00060,000 28,000 Breakeven and Leverage

  9. Nonlinear Break Even Analysis Breakeven and Leverage

  10. Cash Break Even Point Total fixed operating costs = $60,000 Depreciation = $20,000 Unit contribution = $1.20 = 33,333 units Breakeven and Leverage

  11. Leverage Sales Change EPS Change Magnifies a firm’s profits or losses given a change in sales Breakeven and Leverage

  12. Leverage and Earnings Fluctuations Breakeven and Leverage

  13. Leverage Results From Fixed Costs Balance Sheet Breakeven and Leverage

  14. Degree of Operating Leverage or Note: S-VC-FOC = EBIT Breakeven and Leverage

  15. Pro Forma Income Statements P = $2.00 VC = $0.80 FOC = $60,000 Breakeven and Leverage

  16. Operating Leverage at Q = 80,000 S - VC = 80,000($2.00 - $0.80) = $96,000 EBIT = S - VC - FOC = $96,000 - $60,000 = $36,000 DOL = = 2.7 Breakeven and Leverage

  17. DOL at Q = 100,000 S - VC = 100,000($2.00 - $0.80) = $120,000 EBIT = $120,000 - $60,000 = $60,000 DOL = = 2.0 Breakeven and Leverage

  18. DOL at Q = 60,000 S - VC = 60,000($2.00 - $0.80) = $72,000 EBIT = $72,000 - $60,000 = $12,000 DOL = = 6.0 Breakeven and Leverage

  19. DOL Formula Check Q 60,000 80,000 EBIT $12,000 $36,000 Breakeven and Leverage

  20. DOL Is an Elasticity (Non Linear!) Breakeven and Leverage

  21. Effects of Financial Leverage Breakeven and Leverage

  22. Financial Leverage at Q = 80,000 Revenue $ 160,000 Var. Cost -64,000 Fixed Op. Cost -60,000 EBIT $ 36,000 Breakeven and Leverage

  23. Financial Leverage at Q = 60,000 Revenue $ 120,000 Var. Cost -48,000 Fixed Op. Cost -60,000 EBIT $ 12,000 Breakeven and Leverage

  24. Financial Leverage or Note: EBIT = EBIT – Int + Int Breakeven and Leverage

  25. Financial Leverage at Q = 80,000 Breakeven and Leverage

  26. EPS ($) • 4 • 3 • 2 • 1 • 0 • -1 • -2 • 0 12 25 50 75 100 Plan A Plan B .25 16 EBIT (thousands) Financing Plans and Earnings per Share Breakeven and Leverage

  27. Combined Leverage DCL = = = = DOL X DFL Breakeven and Leverage

  28. Income Statement Sales (total revenue) (80,000 units @ $2) $160,000 — Fixed costs 60,000 — Variable costs ($0.80 per unit) 64,000 Operating income $ 36,000 Earnings before interest and taxes $ 36,000 — Interest 12,000 Earnings before taxes 24,000 — Taxes 12,000 Earnings after taxes $ 12,000 Shares 8,000 Earnings per share $1.50 Operating leverage Financial leverage Breakeven and Leverage

  29. Combining Operating and Financial Leverage Breakeven and Leverage

  30. Combined Leverage at Q = 80,000 Breakeven and Leverage

  31. Stability in Net Income or EPS X DOL X Breakeven and Leverage

  32. Eat Well vs. Sleep Well Breakeven and Leverage

  33. Summary DOL = = DFL = = DCL = = DCL = DOL * DFL Breakeven and Leverage

  34. Breakeven and Leverage

  35. Breakeven and Leverage

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