The Portable MBA in Finance and Accounting, 3rd Edition

Cost-Volume -Profit Analysis 107

Exhibit 3.4). On my graph, this is the point where the revenue line intersects
the total cost line and is called the break-even point. After that, you are cor-
rect. For any additional book we sell, the $23 contribution per book is all profit.
So, as I see it, there is little risk since you are sure that we will sell at a mini-
mum 10,000 copies per year.”
Abbey became a bit uncomfortable. “Actually, I think this book will sell
about 20,000 copies per year at a minimum. But isn’t my alternative to stay
with my publisher? And if so, shouldn’t we be talking about whether I would be
better off with the Web site?”
Stephen was suddenly not so cocky. Abbey thought that maybe some re-
medial work on those tuition dollars was needed. “I have some work to do. Why
don’t you get back to me on that, Stephen?”
Two nights later, after faxing her two charts, Stephen phoned Abbey. “I
sent you a different type of chart, called a profit chart, which shows the two

EXHIBIT 3.3 Web site CVP analysis.

Dollars (thousands)

Units

Total revenue line

Total cost line

Fixed cost

Profit area

Break-even point

0

500

1,000

1,500

2,000

2,500

0 5,000 10,000 15,000 20,000 25,000

EXHIBIT 3.4 Break-even calculations.

Solving for x,

General Rule: Break-even point Fixed Costs

Contribution Margin

=

$$ $,

$$,

$, ,

80 57 100 000

23 100 000

100 000

23 4 348

xx

x

x

−=

=

== books

Sales Revenue=+Fixed Costs Variable Costs

$$,$80xx=+ 100 000 57