Sahang Sapta A.S, S.Sos., M.Si.

 They affect the economic efficiency (profits)

of the firm.
 An understanding of these relationships
helps managers make more effective
production decisions.

As a result, managers are better able to meet

their financial objectives
MIS provides
1. Accurate and timely production and
cost information on all phases of the
business
2. Data in the proper form needed for
decision making
3. Accounting information that will allow
fast, accurate development of business
financial documents
4. A means for efficiently and effectively
monitoring and controlling business
production costs
 Cost: what is given up to acquire a good or
service

 Opportunity cost: the return (as measured

by the highest value) that is given up in a
foregone use

 Implicit cost: costs that do not include

cash payments but need to be included in
the calculation of the total cost of product
 Controllable and Uncontrollable Costs
 Incremental, Avoidable, and Sunk Costs

 Total Cost = Total Fixed Cost + Total Variable

Costs
 Total Fixed Cost (TFC)
 Total Variable Cost (TVC)
 Total Cost (TC)
 TC
TR
$

BEP

TVC

TFC

Q
Financial Approach
The Costs of Production
 Contribution equals selling price/unit
minus variable cost/unit
 The contribution per unit is used first to pay
fixed costs and later profits

 Selling Price/Unit = Total Cost/Unit +

Profit/Unit
 Total Cost/Unit = Variable Cost/Unit + Fixed
Cost/Unit

Selling Price/Unit – Variable Cost/Unit =

Fixed Cost/Unit + Profit/Unit
 If the contribution/unit is 40% of the selling price/unit,
the selling price/unit would be:
Total [Selling Price
Variable Costs = [1 – Contribution Margin × Per Unit]
Per Unit Percentage]
For example,
$120 = [1 – 0.40] × Selling Price/ Bag

$120
= Selling Price per Bag
0.60

$200 = Selling Price per Bag

 In the short term, a firm with idle capacity
can take a job where the price does not
cover all the total cost as long as the
contribution is positive
(P – AVC > 0).
 If the contribution is negative (P – AVC < 0)
the firm is better off shutting down.
 Over the long term, all costs must be
covered.
 Break-even analysis helps managers find
the combination of costs, output, and
selling price that permits the firm to break
even, with no profits and losses

Selling Price

Output Costs
 The break-even point is calculated from
the profit equation when profit is zero.
Profit = 0 = Total Revenue – Total Cost
0 = Total Revenue – TVC/Unit – TFC
= P×Q – VC × Q – TFC

= (P – VC) Q – TFC
TFC = (P – VC) Q
Q = TFC
= Break-Even Point in Units
(P – VC)
 If TFC is $ 100,000
 And the VC per unit is $ 120
 Selling price is $ 200
 How many unit of product that the company
must produce, that meet the BEP condition?
 TFC TFC
$BEP = =
GPM 1 – (VC/P)
Where: $BEP= Break-Even Point in Dollars
TFC = Total Fixed Costs
GPM = Gross Profit Margin

For example,
We know from previous calculation that the selling
price is $ 200
If the VC per unit is $ 120
And TFC is $ 100,000
How much the $ that meet BEP condition?
 TFC
BEP$ =
(CMP – RPP)
RPP = Required Profit Percentage
For example,
$750,000
BEP$ =
(0.40 – 0.10)
= $2,500,000

(or 20,000 bags at $125 per bag)

 Suppose the company has type A and type B
of bag. How much the company must sell to
meet the Break Even Condition?
 We already have the information above for
type A bag and for the type B bag it has the
information as follows:
 Selling Price $ 360
 Variable cost per unit $ 240
 CM $ 120
 Find the quantity that meet the BEP condition
for both product!
 Type A Type B
Price $ 200 $ 360
Variable $ 120 $ 240
CM $ 80 $ 120 Total
Fixed Cost $ 100,000
production 100 unit 150 unit Total
Weighted
Average

WA  CM  Pr oduction
 Minimum Change
Change in Fixed Costs
= in Dollar Sales Needed
Contribution Margin Percentage to Break Even for the
Change in Fixed Costs

For example,

$1.00
= $2.50 = the minimum increase in dollar sales
0.40 needed to break even for each new dollar
spent on fixed costs
Selling Price/Unit = Contribution + Variable Cost/Unit

If Variable Cost/Unit is known, all that is needed is Contribution

Contribution can be determined by rearranging the terms

of the break-even equation
TFC
= Y
Contribution
TFC
= Contribution
Y
 Suppose that a company has financial data as
follows (in hundreds of thousands);
 TFC: $ 10

 Raw material: $ 5/unit
 Labor Cost: $ 3.5/unit
 Transportation Cost: $ 1.5/unit
 P = 50 – 5Q
 Find BEP of Quantity and Total Revenue
 TC = TFC + TVC
 TC = 10 + 10Q
 TR = PQ = (50 – 5Q)Q
 BEP => TR = TC
$  b  b  4ac
2
x1 , x2 
2a

TC

TR

Q
Thank You