What happens if one of the variables changes? There can be increases or decreases in the selling price, variable costs per unit, or fixed costs, with any combination of changes in these variables. How will changes affect the units and sales in dollars needed to break even? How will changes affect the units and sales in dollars needed to reach the target market? A what-if analysis can also be used to increase or decrease the number of units sold to see how it affects the bottom line (net income).
You will work through a couple examples using the information from the CVP example.
Below is the initial information:
| Sales price per unit | $100 |
| Minus: variable cost per unit | $60 |
| Equals: contribution margin per unit | $40 |
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| Fixed costs | $1,500,000 |
What would happen to your calculations for the breakeven point and target profit if you could raise the selling price by 10% to $110 (assuming all other variables remain the same)? After the change, you will have a new contribution margin per unit: $50.
| Sales price per unit | $110 |
| Minus: variable cost per unit | $60 |
| Equals: contribution margin per unit | $50 |
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-
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| Fixed costs | $1,500,000 |
You would use the same formula you've been using to calculate the breakeven point in units:
The target profit for breakeven calculations is always $0.
Check the numbers:
| Sales (30,000 units x $110 per unit) | $3,300,000 |
| Variable costs (30,000 x $60 per unit) | $1,800,000 |
| Contribution margin per unit (30,000 units x $50 per unit) | $1,500,000 |
| Less: fixed costs | $1,500,000 |
| Net income | $0 |
At a selling price of $100, the breakeven point in units equaled 37,500. At a selling price of $110, though, the breakeven point in units equaled 30,000. This means that the company could sell 7,500 fewer units and still break even if it could raise its price by 10%.
Below is the initial information:
| Sales price per unit | $100 |
| Minus: variable cost per unit | $60 |
| Equals: contribution margin per unit | $40 |
|
-
|
-
|
| Fixed costs | $1,500,000 |
What would happen to your calculations for the breakeven point and target profit if you could find a way to reduce the company's variable costs per unit by $5 (assuming all other variables remain the same)? After the change, you will have a new contribution margin per unit: $45.
| Sales price per unit | $100 |
| Minus: variable cost per unit | $55 |
| Equals: contribution margin per unit | $45 |
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-
|
-
|
| Fixed costs | $1,500,000 |
The math is the same! Use the same formula you've been using to calculate the breakeven point in units:
Since a company cannot sell part of a product, round up to the next whole unit: 33,334 units.
Check the numbers:
| Sales (33,334 units x $100 per unit) | $3,333,400 |
| Variable costs (33,334 x $55 per unit) | $1,833,370 |
| Contribution margin per unit (33,334 units x $45 per unit) | $1,500,030 |
| Less: fixed costs | $1,500,030 |
| Net income | $30 |
With a per-unit variable cost of $60, the breakeven point in units equaled 37,500. With a per-unit variable cost of $55, the breakeven point in units equaled 33,334. This means that the company could sell 4,166 fewer units and still break even if it could find a way to lower its variable cost per unit by $5.
Using this analysis, you can change any of the variables, including the target profit.