Break Even Analysis Flashcards
fixed costs
remain the same regardless of volume
variable costs
increase in direct proportion to vol of sales
in pharmacy, the largest variable cost is COGS
semi variable costs
costs which include both a fixed and variable component
relevant range
fixed costs are fixed over a range of sale volumes
Break-even analysis (BEA)
the volume at which the total revenue, or sales, equal total costs
AT BE, THE PHARMACY DOES NOT MAKE A PROFIT OR SUFFER A LOSS
Single product or multi product pharmacy BE
One product= may be calc in either dollars/sales OR in units of the product produced (Ex. a pharmacy which ONLY sells Rx’s or home IV company)
Multi-product= must be calculated as the sales volume where total revenues equal total costs (Ex. chain drug stores, institutional pharmacies)
Where is the data needed to calculate BEA?
in the income statement
Finding the break-even point on a graph
point at which the total revenue line intersects the total cost line
Total revenue line for a single product pharmacy
product of average Rx price and # of Rx’s dispensed
Graph for single product pharmacy
x-axis= # of Rx's dispensed y-axis= dollars of revenue or costs
Total cost line for single product pharmacy
defined by the sum of fixed costs and variable costs at several levels of Rx volume
need average variable cost per Rx (total VC/ # of Rx’s dispensed)
Contribution margin approach to BEA
BEP can also be calculated using the contribution margin approach
contribution margin
revenue minus variable costs
amt of revenue available to cover fixed costs and net income (larger the contribution margin, the more we have left over to cover our fixed costs and still have net profit)
CM%
(Sales/sales) - (VC/sales)
indicated how many cents per every dollar of sales are available for fixed costs and profit
CM% indicates for every dollar over the BEP how many cents of profit you have and for every dollar under the BEP how many cents of loss you have
Contribution approach to BEA
BEP= FC/ CM%
Finding CM for a pharmacy producing a single product
Ave Rx Price - Ave Variable Cost = CM per Rx (the leftover for fixed costs and profit)
AVP= total variable costs/ # of Rx’s sold
BEP is found by taking FC and dividing CM per Rx
Assumptions of BEA
- valid and reliable data on costs and revenues are available
- all costs are correctly classified as fixed or variable
- costs and revenues act in a linear manner (when we have inflation they may not move in a linear manner)
- BEA applied to restricted, relevant range of sales volume (NOT for long-range planning)
- product mix must not change over the period covered by BEA (will change overall CM)
Stay even point in multi-product pharmacy
(fixed costs + net income) / CM%
Add in additional costs to the amt in parentheses in the equation
for if you change some points in the BEA
Stay even point in single product pharmacy
(fixed cost + net income) / per Rx CM
