CHAPTER #4:

BREAK-EVEN ANALYSIS
 CHAPTER TOPICS

• Break-even analysis defined

• Break-even analysis of price changes
• Break-even analysis with cost changes
• Brea-even sales curves
 BREAK-EVEN ANALYSIS DEFINED

• The break-even point is given as that point at which total revenue equals total
cost and profit is zero:

𝑝𝑣 − 𝑐𝑣 𝑣 − 𝑐𝑓 = 0 (4.1)
• 𝑝 is the price, 𝑐𝑣 is the variable unit costs, 𝑣 is the volume, and 𝑐𝑓 is the fixed costs
• The expression can be rewritten:

𝑣 𝑝 − 𝑐𝑣 = 𝑐𝑓 (4.2)

𝑐𝑓
𝑣= (4.3)
𝑝 − 𝑐𝑣
• That is, the break-even point is equal to the fixed costs divided by the contribution
margin.
 BREAK-EVEN ANALYSIS OF PRICE
CHANGES

• A price change induce a gain or loss in contribution margin and sales volume
• We want to find the change in sales that ensures the contribution gained or
lost due to a price change is exactly equal to the contribution gained or lost
due to a volume change
• In other words, break-even analysis of price changes finds the volume change
needed to break-even
 BREAK-EVEN ANALYSIS
OF PRICE CHANGES
• This concept is illustrated in Figure 4.1.
• Before any price change takes place, the price
is p1, the company sells v1 units, and has
variable costs equal to area A, and total
contribution margin (CM) equal to area B+C.
The company then decides to reduce the
price from p1 to p2.
• The contribution lost due to price reduction
is area C and the contribution gained due to
increased sales volume is area E. Area D is
additional variable costs due to increased sales
volume. To break-even from the price
reduction, area E must be equal to area C.
• In other words, this price reduction is
profitable if and only if area E (gain) is at least
as big as area C (loss).
Figure 4-1: Effects of a price reduction on sales
volume and contribution margin.
 BREAK-EVEN ANALYSIS OF PRICE
CHANGES: EXAMPLE (1/4)

• To better understand this, consider again the coffee shop example introduced
in Chapter 1. Table below summarizes the initial status of price, units sold
(cups), and variable and fixed costs.

Price/cup $2.00
Daily sales (cups) 84
Variable costs (per unit) $0.50
Fixed costs $20.00
 BREAK-EVEN ANALYSIS OF PRICE
CHANGES: EXAMPLE (2/4)

• Problem:
• The coffee shop wants to cut its
price from $2.00 to $1.50.
• How much must sales volume
increase to break-even?
• Solution:
• Area C must be equal to area E

Figure 4-2: Illustration of the status of the coffee shop Figure 4-3: Illustration of the effects of a price
before the price change is introduced. reduction for one cup of coffee of $0.50.
 BREAK-EVEN ANALYSIS OF PRICE CHANGES:
EXAMPLE (3/4)

• That is, for this price change to break even, we must have:
• The contribution gained from increased sales (area E) = Absolute value of the
contribution lost resulting from the lower price (area C).
• Thus, if we denote the required sales volume change as 𝑥, the following
equation will solve the problem:
$42
• $1.00 × 𝑥 = $ต
42 ⇒ 𝑥 = $1.00 = 42
𝐴𝑟𝑒𝑎 𝐸 𝐴𝑟𝑒𝑎 𝐶

• The new sales volume can then be easily found by adding 42 cups to the sales
volume before the price change took place:
• 𝑣2 = 𝑣1 + ∆𝑣 = 84 + 42 = 126
 B R E AK - EV EN ANALYSI S OF
P R I CE CH ANG E S: E XAMP L E
(4/4)

Area of Figure 4-3 Calculations

A: Total variable costs 𝑐𝑣 𝑣1 = $0.5 × 84 = $42
before price change / part
of variable costs after
price change
B: Part of total 𝑝2 − 𝑐𝑣 𝑣1 = $1.50 − $0.50 × 84 = $84
contribution margin
before/after price change
C: Contribution lost due 𝑝2 − 𝑝1 𝑣1 = $2.00 − $1.50 × 84 = −$42
to price reduction
D: Additional variable 𝑐𝑣 𝑣2 − 𝑣1 = $0.50 × 126 − 84 = $21
costs due to increased
sales volume
E: Contribution gained (𝑝2 −𝑐𝑣 ) 𝑣2 − 𝑣1 = ($1.50 − $0.50) × (126 − 84) = $42
due to increased sales
volume

Table 4-2: Calculations of the various areas of Figure 4-3.

Figure 4-3: Illustration of the effects of a price reduction for one cup of coffee
of $0.50.
 BREAK-EVEN ANALYSIS OF PRICE
CHANGES

• By using this example, we can derive a general expression to calculate the

relative (per cent) sales volume change needed to break even from a given
absolute price change. We know that area C must be equal to area E for this to
be the case.
• If we use the notation in the figure, we can express the total contribution
margin before the price change as (𝑝1 − 𝑐𝑣 )𝑣1 (area B+C). After the price
change, the margin is (𝑝2 − 𝑐𝑣 )𝑣2 (area B+E). Note that 𝑝2 = 𝑝1 + ∆𝑝 and that
𝑣2 = 𝑣1 + ∆𝑣, and remember that both ∆𝑝 and ∆𝑣 can be negative. As our
objective is to find ∆𝑣 for which the profit is the same before and after the
price change, we can formulate the problem as follows:
BREAK-EVEN ANALYSIS OF PRICE CHANGES
BREAK-EVEN ANALYSIS OF PRICE CHANGES

(𝑤ℎ𝑒𝑟𝑒 𝐶𝑀 = 𝑝1 −𝑐𝑣 )
%𝐵𝐸𝑆𝐶
 BREAK-EVEN WITH COST CHANGES ( 1/5)
• What happens if there is a change in either fixed or variable costs when a price change is
introduced?
• Let us first consider a situation where a price change will cause a change in variable costs.
• In this case, the only thing needed is a slight modification of Equation (4.4) to incorporate
change in variable costs:

• Or:
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−Δ𝐶𝑀 − 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1
%𝐵𝐸𝑆𝐶 = = 4.6
𝑁𝑒𝑤 𝐶𝑀 𝑝2 − 𝑐𝑣2

• where BESC stands for break-even sales change.

 BREAK-EVEN WITH
COST CHANGES (2/5)
• Figure 4.4 illustrates a situation where
there is both a price reduction (from 𝑝1 to
𝑝2 ) and a simultaneous reduction in unit
variable cost (from 𝑐𝑣1 to 𝑐𝑣2 ).
• It is clear from this figure that there is an
additional gain in contribution due to
reduced variable costs (area F). Hence, the
required gain from increased volume (area
E) does not have to be as big as if there
were no reduction in the variable costs.
• Hence, the relation that will induce no
change in the overall profit (the break-even
condition) can now be expressed as:
• 𝐶 =𝐸+𝐹 Figure 4-4: Break-even sales change given change in price and variable costs.
 BREAK-EVEN WITH COST CHANGES ( 3/5)
• Consider again the coffee shop example, but now assume that a price reduction of
$0.50 (from $2.00 to $1.50) is associated with a reduction in unit variable costs of
$0.10 (from $0.50 to $0.40). What is now the required sales volume change to break
even?
• To solve this problem, we can apply Equation (4.6) directly:
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−Δ𝐶𝑀 −[ 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 ]
%𝐵𝐸𝑆𝐶 = =
𝑁𝑒𝑤 𝐶𝑀 𝑝2 − 𝑐𝑣2

𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−[ 1.5 − 0.4 − 2.0 − 0.5 ] −(1.1 − 1.5) −(−0.4) 0.4
= = = = = 0.3636 (36.4%)
1.5 − 0.4 1.1 1.1 1.1
• That is, an increase in sales volume of 36.4% is required to break even in the given
example. This corresponds to 84 ∗ 0 .364 ≅ 31 extra units, and the new required total
sales volume would be 84 + 31 = 115.
 BREAK-EVEN WITH COST CHANGES ( 4/5)

• In some cases, there is a need to undertake an investment in order to later

implement a price change. For example, a new machine may be needed in
order to reduce the variable costs associated with producing an item, which in
turn is needed in order to reduce the price. These were defined as incremental
fixed costs in Chapter 2.
• For a price change to be justified, the decision makers must account for these
additional costs associated with implementing a price change.
 BREAK-EVEN WITH COST CHANGES ( 5/5)

• Problem: “How many units must be sold in order to cover an incremental investment of x
dollars?”

• The answer is the unit break-even sales change (UBESC):

−Δ𝐶𝑀 Δ𝐶𝑓
• 𝑈𝐵𝐸𝑆𝐶 = + 𝑁𝑒𝑤 𝐶𝑀×𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 (4.7)
𝑁𝑒𝑤 𝐶𝑀
%𝐵𝐸𝑆𝐶

• The corresponding relative (per cent) break-even sales change (%BESC) is:
−Δ𝐶𝑀 Δ𝐶𝑓
• %𝐵𝐸𝑆𝐶 = 𝑁𝑒𝑤 𝐶𝑀 + 𝑁𝑒𝑤 𝐶𝑀×𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒 (4.8)

• You can verify that these formulas can be used in any scenario. If there is no change in
fixed costs, then equation (4.8) becomes the same as equation (4.6).
 EXAMPLE: CHANGE IN PRICE, VC , AND FC
• 𝒑𝟏 : $2.00, 𝒑𝟐 : $1.50, 𝒄𝒗𝟏 : $0.50, 𝒄𝒗𝟐 : $0.40, Change in fixed costs to handle increased sales volume: $20.
Initial sales is 84 cups. What is the minimum required sales increase to justify the given price
reduction? What is the corresponding relative (per cent) break-even sales change?
−Δ𝐶𝑀 Δ𝐶𝑓
%𝐵𝐸𝑆𝐶 = +
𝑁𝑒𝑤 𝐶𝑀 𝑁𝑒𝑤 𝐶𝑀 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−[ 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 ] Δ𝐶𝑓
= +
𝑝2 − 𝑐𝑣2 𝑝2 − 𝑐𝑣2 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−[ 1.5 − 0.4 − 2.0 − 0.5 ] 20 −(1.1 − 1.5) 20
= + = +
1.5 − 0.4 1.5 − 0.4 (84) 1.1 1.1 (84)

−(−0.4) 20
= + = 0.3636 + 0.2165 = 𝟎. 𝟓𝟖𝟎𝟏 (𝟓𝟖. 𝟎𝟏%)
1.1 92.4
And,
• 𝑈𝐵𝐸𝑆𝐶 = %𝐵𝐸𝑆𝐶 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 0.5801 84 = 𝟒𝟖. 𝟕𝟐𝟖𝟒
 PROBLEMS (PAGES 61-62)

• 1. Calculate the break-even sales volume for a company where the market
price is $25, the variable unit costs are $10 and the fixed costs are $25,000.
Verify your calculations by calculating the profit for this sales volume.
• Break-even sales volume:
𝑐𝑓 25000 25000
• 𝑣= 𝑝−𝑐𝑣
= 25−10
= 15
= 1666.667

• Profit:
• 𝑍 = 𝑝𝑣 − 𝑐𝑣 𝑣 − 𝑐𝑓 = 25 1666.667 − 10 1666.667 − 25000
= 25 − 10 1666.667 − 25000
= 15 1666.667 − 25000
= 25000 − 25000 = 0
 PROBLEMS (PAGES 61-62)

• 2. A coffee shop is considering investing in a new machine that produces a

brand new type of coffee. The manager believes the new type of coffee can be
sold for $5/ unit. The variable cost is $3/ unit. The machine costs $1,000.
Determine how many cups of coffee must be sold to break even?
• The number cups of coffee that must be sold to break even:
𝑐𝑓 1000 1000
• 𝑣= = = = 500
𝑝−𝑐𝑣 5−3 2

• 3. If the coffee shop in the previous problem sells ten cups of the new coffee
per day on average, how many days will it take to break even?
• The number of days to break even:
500
• = 50
10
 PROBLEMS (PAGES 61-62)

• 4. The manager of the coffee shop in problems 2 and 3 says that the input used
in the break- even analysis may be a bit too optimistic. The variable unit costs
will be 25% higher than previously stated. How will this affect the break-even
sales volume if the price remains the same?
• The new variable unit costs: 𝑐𝑣 = 3 1 + 0.25 = 3.75. So the break-even sales
volume is now:
𝑐𝑓 1000 1000
• 𝑣= = = = 800
𝑝−𝑐𝑣 5−3.75 1.25
 PROBLEMS (PAGES 61-62)

• 5. Calculate the percentage break-even sales volume change needed to justify a

price decrease of 10% in the scenarios given in the table below. Do the same
calculations for a price decrease of 15%. Finally, how much sales can the
company afford to lose if it increases the price by 20%?

Change in price
Price Current CM 10% decrease 15% decrease 20% increase
10 5 ? ? ?
15 10 ? ? ?
25 20 ? ? ?
90 40 ? ? ?
150 50 ? ? ?
 PROBLEMS (PAGES 61-62)

• Solution:

Change in price
Price Current CM 10% decrease 15% decrease 20% increase
10 5 25.00% 42.9 % -28.6 %
15 10 17.65% 29.0 % -23.1 %
25 20 14.29% 23.1 % -20.0 %
90 40 29.03% 50.9 % -31.0 %
150 50 42.86% 81.8 % -37.5 %
 PROBLEMS (PAGES 61-62)

• Let’s show the solution only for 𝑝 = 10. (Do the others as homework.)

• A price decrease of 10% (New price: 𝑝 = 10 ∗ 1 − 0.1 = 9):

−𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 −(9−10) −(−1) 1
• %𝐵𝐸𝑆𝐶 = 𝐶𝑀 + 𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 = 5+(9−10) = = 4 = 0.25 (25%)
5−1

• A price decrease of 15% (New price: 𝑝 = 10 ∗ 1 − 0.15 = 8.5):

−𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 −(8.5−10) −(−1.5) 1.5
• %𝐵𝐸𝑆𝐶 = 𝐶𝑀 + 𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 = 5+(8.5−10) = = 3.5 = 0.429 (42.9%)
5−1.5

• A price increase of 20% (New price: 𝑝 = 10 ∗ 1 + 0.2 = 12):

−𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 −(12−10) −2 −2
• %𝐵𝐸𝑆𝐶 = 𝐶𝑀 + 𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 = 5+(12−10) = 5+2 = = −0.286 (−28.6%)
7
 PROBLEMS (PAGES 61-62)

• 6. Use the information in the table below to calculate the percentage break-
even sales change:

Time 1 Time 2
Price 90 85
VUC 40 38
CM 50 47
 PROBLEMS (PAGES 61-62)
• We have:

Time 1 Time 2 Change

Price 90 85 -5
VUC 40 38 -2
CM 50 47 -3

𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−Δ𝐶𝑀 −[ 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 ]
%𝐵𝐸𝑆𝐶 = =
𝑁𝑒𝑤 𝐶𝑀 𝑝2 − 𝑐𝑣2

𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−[ 85 − 38 − 90 − 40 ] −(47 − 50) −(−3) 3
= = = = = 0.0638 6.38%
85 − 38 47 47 47
OR:
−Δ𝐶𝑀 𝐶𝑀2 − 𝐶𝑀1 47 − 50 3
%𝐵𝐸𝑆𝐶 = = = = = 0.0638 6.38%
𝑁𝑒𝑤 𝐶𝑀 𝐶𝑀2 47 47
 PROBLEMS (PAGES 61-62)
• 7. A firm produces and sells a widget. Information about the current price,
yearly sales, and costs are given in the table below:
Price/unit $10.00
Yearly sales 20,000
Revenues $200,000.00
Variable costs (per unit) $7.00
Variable costs $140,000.00
Contribution $60,000.00
Fixed costs $10,000.00
Profit $50,000.00
• The firm considers a price reduction from $10 to $8.90. Use this information
to calculate (1) the break- even sales change both in absolute and relative
terms, and (2) the reduced contribution due to the price reduction, the
increased contribution due to the sales volume increase and the increase in
total variable costs.
 PROBLEMS (PAGES 61-62)

• (1)
• The break-even sales change in absolute terms:
−Δ𝑝𝑣1 −(𝑝2 −𝑝1 )𝑣1 −(8.9−10)(20000) 22000
• 𝑈𝐵𝐸𝑆𝐶 = ∆𝑣 = = = = = 11578.9
𝑝1 +Δ𝑝−𝑐𝑣 𝑝1 +(𝑝2 −𝑝1 )−𝑐𝑣 10+(8.9−10)−7 1.9

• The break-even sales change in relative terms:

−𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 (𝑝2 −𝑝1 ) −(8.9−10) −(−1.1) 1.1
• %𝐵𝐸𝑆𝐶 = = = = = = 0.579 (57.9%)
𝐶𝑀 + 𝑃𝑟𝑖𝑐𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 (𝑝1 −𝑐𝑣 )+(𝑝2 −𝑝1 ) (10−7)+(8.9−10) 3−1.1 1.9

• Or, since we have already found ∆𝑣, it can simply be calculated as:
∆𝑣 11578.9
• %𝐵𝐸𝑆𝐶 = = = 0.579 (57.9%)
𝑣1 20000
 PROBLEMS (PAGES 61-62)

• (2)
• Reduced contribution due to price reduction:
• 𝐴𝑟𝑒𝑎 𝐶 = (𝑝2 − 𝑝1 )𝑣1
= 8.9 − 10 20000 = −22000
• Increased contribution due to sales volume
increase:
𝐴𝑟𝑒𝑎 𝐸 = 𝑝2 − 𝑐𝑣 𝑣2 − 𝑣1
= 8.9 − 7 11578.9 = 22000
• Increase in total variable costs:
• 𝐴𝑟𝑒𝑎 𝐷 = 𝑐𝑣 𝑣2 − 𝑣1
= 7 11578.9 = 81052.3
 PROBLEMS (PAGES 61-62)

• 8. Use the information from the table in problem 7, but now assume that that the
variable costs are also reduced from $7 to $6. How will this affect the results?
• (1)
• The break-even sales change in relative terms:
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀 𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀
−Δ𝐶𝑀 −[ 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 ] −[ 8.9 − 6 − 10 − 7 ]
%𝐵𝐸𝑆𝐶 = = =
𝑁𝑒𝑤 𝐶𝑀 𝑝2 − 𝑐𝑣2 8.9 − 6

−(2.9 − 3) −(−0.1) 0.1

= = = = 0.0345 (3.45%)
2.9 2.9 2.9
• The break-even sales change in absolute terms:
−Δ𝐶𝑀
𝑈𝐵𝐸𝑆𝐶 = ∗ 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = (0.0345)(20000) = 690
𝑁𝑒𝑤 𝐶𝑀
 PROBLEMS (PAGES 61-62)

• (2)
• Reduced contribution due to price reduction:
• 𝐴𝑟𝑒𝑎 𝐶 = (𝑝2 − 𝑝1 )𝑣1
= 8.9 − 10 20000 = −22000
• Increased contribution due to sales volume
increase:
𝐴𝑟𝑒𝑎 𝐸 = 𝑝2 − 𝑐𝑣1 𝑣2 − 𝑣1
= 8.9 − 7 689.655 = 1310.3445
• Increase in total variable costs:
• 𝐴𝑟𝑒𝑎 𝐷 = 𝑐𝑣2 𝑣2 − 𝑣1
= 6 689.655 = 4137.93
 PROBLEMS (PAGES 61-62)

• 9. Use the information from the table in problem 7 and the updated information given in
problem 8, but now assume that the fixed costs also change because of the price change
(and hence increased sales volume) from $10,000 to $20,000. How will this new
information affect the results?
• (1)
• The break-even sales change in relative terms:
−Δ𝐶𝑀 Δ𝐶𝑓
%𝐵𝐸𝑆𝐶 = +
𝑁𝑒𝑤 𝐶𝑀 𝑁𝑒𝑤 𝐶𝑀 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒
−Δ𝐶𝑀
We have already calculated = 0.0345. So,
𝑁𝑒𝑤 𝐶𝑀

𝑐𝑓2 − 𝑐𝑓1 20000 − 10000

%𝐵𝐸𝑆𝐶 = 0.0345 + = 0.0345 +
𝑝2 − 𝑐𝑣2 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒 8.9 − 6 (20000)
10000 1
= 0.0345 + = 0.0345 + = 0.0345 + 0.1724 = 0.2069 (20.69%)
58000 5.8
 PROBLEMS (PAGES 61-62)
• The break-even sales change in absolute terms:
−Δ𝐶𝑀 Δ𝐶𝑓
• 𝑈𝐵𝐸𝑆𝐶 = 𝑁𝑒𝑤 𝐶𝑀
+ 𝑁𝑒𝑤 𝐶𝑀×𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
%𝐵𝐸𝑆𝐶
•
−Δ𝐶𝑀 Δ𝐶𝑓
= × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 + × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝑁𝑒𝑤 𝐶𝑀 𝑁𝑒𝑤 𝐶𝑀 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒
𝑈𝐵𝐸𝑆𝐶 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝐹𝐶 𝑈𝐵𝑆𝐶 𝑓𝑟𝑜𝑚 ∆𝐹𝐶
•
= 0.0345 20000 + 0.1724 20000 = 6ต
90 + 3448 = 4138
𝑈𝐵𝐸𝑆𝐶 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝐹𝐶 𝑈𝐵𝐸𝑆𝐶 𝑓𝑟𝑜𝑚 ∆𝐹𝐶

• Or, simply (since we have already found %𝐵𝐸𝑆𝐶 on the previous page):

• 𝑈𝐵𝐸𝑆𝐶 = %𝐵𝐸𝑆𝐶 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = (0.2069)(20000) = 4138

• The reduced contribution due to price reduction, the increased contribution due to sales
volume, and the increase in total variable costs will be the same as in the previous question
because their values are not affected by a change in the fixed costs.
 PROBLEMS (PAGES 61-62)

• 10. Provide a graphical illustration of (1) contribution lost due to price, (2) contribution
gained due to volume, and (3) total contribution and total variable costs for the new
break- even sales volume, given the numbers presented below. The illustration should be
similar to that presented in Figure 4.4, but also include the actual amounts of (1), (2), and
(3).

Time 1 Time 2
Price 20 15
VUC 13 12
CM 7 3
Sales Volume 1,200 ?
Tot VC ? ?
Tot CM ? ?
 PROBLEMS (PAGES 61-62)
Sales
Volume

Additional variable costs

𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀 (increased volume) Contribution gained
−Δ𝐶𝑀 −[ 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 ] (increased volume)
%𝐵𝐸𝑆𝐶 = = 2800
𝑁𝑒𝑤 𝐶𝑀 𝑝2 − 𝑐𝑣2
D E Contribution lost
𝑁𝑒𝑤 𝐶𝑀 𝑂𝑙𝑑 𝐶𝑀 (reduced price)
−[ 15 − 12 − 20 − 13 ] −(3 − 7) −(−4) Δ𝑣 (+)
𝑐𝑣 𝐶𝑀
= = = Contribution gained
15 − 12 3 3 Δ>0
4 Δ>0 (reduced variable costs)
= = 1.33333 (133.333%) 1200 F
3
A B C
• So,
𝑐𝑣
• 𝑈𝐵𝐸𝑆𝐶 = %𝐵𝐸𝑆𝐶 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 𝐶𝑀 𝐶𝑀

(1.33333)(1200) = 1600 Δ<0 Δ=0 Δ<0

0
Price
• Therefore, the sales volume in Time 2 is: 15 20
12 13
• 𝑣2 = 𝑣1 + 1600 = 1200 + 1596 = 2800
Δ𝑐𝑣 (−) Δ𝑝 (−)
 PROBLEMS (PAGES 61-62) Sales
Volume

Additional variable costs

• Total variable cost in Time 1: (increased volume) Contribution gained
• 𝐴𝑟𝑒𝑎 𝐴 = 𝑐𝑣1 𝑣1 = 13 1200 = 15600 (increased volume)
2800
• Total variable cost in Time 2:
D E Contribution lost
• 𝐴𝑟𝑒𝑎 𝐴 + 𝐷 = 𝑐𝑣2 𝑣2 = 12 2800 = 33600 (reduced price)
Δ𝑣 (+)
• Total variable cost in Time 1: 𝑐𝑣 𝐶𝑀
Contribution gained
• 𝐴𝑟𝑒𝑎 𝐵 + 𝐶 = 20 − 13 1200 = 8400 Δ>0 Δ>0 (reduced variable costs)
1200 F
• Total variable cost in Time 2:
A B C
• 𝐴𝑟𝑒𝑎 𝐵 + 𝐸 + 𝐹 = 15 − 12 2800 = 8400
𝑐𝑣
• Contribution lost due to price: 𝐶𝑀 𝐶𝑀

• 𝐴𝑟𝑒𝑎 𝐶 = − 20 − 15 1200 = 6000 Δ<0 Δ=0 Δ<0

0
• Contribution gained due to volume: Price
15 20
12 13
• 𝐴𝑟𝑒𝑎 𝐸 = 15 − 13 (2800 − 1200) = 3200
Δ𝑐𝑣 (−) Δ𝑝 (−)
 PROBLEMS (PAGES 61-62)

• So, we have found all the unknowns in the table.

Time 1 Time 2
Price 20 15
VUC 13 12
CM 7 3
Sales Volume 1,200 2800
Tot VC 15600 33600
Tot CM 8400 8400
 PROBLEMS (PAGES 61-62)
• 11. A company is considering investing in a new machine that makes the
production process more efficient. The machine costs $15,000 and will lower
the variable costs by $2. The goal of the investment is to increase production
by selling the product $3 cheaper than the current price of $38. What is the
percentage break- even sales volume change when we know that the company
currently is producing and selling 10,000 units of the product and has a
(current) contribution of $10 per unit sold?

• First note that

• Δ𝐶𝑀 = 𝑝2 − 𝑐𝑣2 − 𝑝1 − 𝑐𝑣1 = 𝑝2 − 𝑝1 + 𝑐𝑣1 − 𝑐𝑣2 = −3 + 2 = −1

• Also note

• Δ𝐶𝑀 = 𝑁𝑒𝑤 𝐶𝑀 − 𝑂𝑙𝑑 𝐶𝑀 ⇒ −1 = 𝑁𝑒𝑤 𝐶𝑀 − 10 ⇒ 𝑁𝑒𝑤 𝐶𝑀 = 9

• Therefore,
 PROBLEMS (PAGES 61-62)

−Δ𝐶𝑀 Δ𝐶𝑓
%𝐵𝐸𝑆𝐶 = +
𝑁𝑒𝑤 𝐶𝑀 𝑁𝑒𝑤 𝐶𝑀 × 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒

−(−1) 15000
= +
9 9 × 10000

1 15 25
= + = = 0.27777 (27.78%)
9 90 90