Principles of Managerial Finance

CHAPTER 12 Leverage and Capital Structure 511

Sales

Revenue

Total

Operating

Cost

Operating

Breakeven

Point

EBIT

Fixed

Operating

Cost

0 500 1,000 1,500 2,000 2,500 3,000

Loss

12,000

10,000

8,000

6,000

4,000

2,000

Costs/Revenues ($)

Sales (units)

FIGURE 12.1

Breakeven Analysis
Graphical operating
breakeven analysis

TABLE 12.3 Sensitivity of Operating

Breakeven Point to Increases

in Key Breakeven Variables

Effect on operating

Increase in variable breakeven point

Fixed operating cost (FC) Increase

Sale price per unit (P) Decrease

Variable operating cost per unit (VC) Increase

Note:Decreases in each of the variables shown would have the oppo-

site effect from their effect on operating breakeven point.

EXAMPLE Assume that Cheryl’s Posters wishes to evaluate the impact of several options: (1)

increasing fixed operating costs to $3,000, (2) increasing the sale price per unit to

$12.50, (3) increasing the variable operating cost per unit to $7.50, and (4)

simultaneously implementing all three of these changes. Substituting the appro-

priate data into Equation 12.3 yields the following results:

(1) Operating breakeven point600 units

(2) Operating breakeven point 3331 ⁄ 3 units

$2,500



$12.50$5

$3,000



$10$5