Break Even Analysis

Question 1

fixed costs

Answer 1

remain the same regardless of volume

Question 2

variable costs

Answer 2

increase in direct proportion to vol of sales

in pharmacy, the largest variable cost is COGS

Question 3

semi variable costs

Answer 3

costs which include both a fixed and variable component

Question 4

relevant range

Answer 4

fixed costs are fixed over a range of sale volumes

Question 5

Break-even analysis (BEA)

Answer 5

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

Question 6

Single product or multi product pharmacy BE

Answer 6

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)

Question 7

Where is the data needed to calculate BEA?

Answer 7

in the income statement

Question 8

Finding the break-even point on a graph

Answer 8

point at which the total revenue line intersects the total cost line

Question 9

Total revenue line for a single product pharmacy

Answer 9

product of average Rx price and # of Rx’s dispensed

Question 10

Graph for single product pharmacy

Answer 10

x-axis= # of Rx's dispensed
y-axis= dollars of revenue or costs

Question 11

Total cost line for single product pharmacy

Answer 11

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)

Question 12

Contribution margin approach to BEA

Answer 12

BEP can also be calculated using the contribution margin approach

Question 13

contribution margin

Answer 13

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)

Question 14

CM%

Answer 14

(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

Question 15

Contribution approach to BEA

Answer 15

BEP= FC/ CM%

Question 16

Finding CM for a pharmacy producing a single product

Answer 16

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

Question 17

Assumptions of BEA

Answer 17

1. valid and reliable data on costs and revenues are available
2. all costs are correctly classified as fixed or variable
3. costs and revenues act in a linear manner (when we have inflation they may not move in a linear manner)
4. BEA applied to restricted, relevant range of sales volume (NOT for long-range planning)
5. product mix must not change over the period covered by BEA (will change overall CM)

Question 18

Stay even point in multi-product pharmacy

Answer 18

(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

Question 19

Stay even point in single product pharmacy

Answer 19

(fixed cost + net income) / per Rx CM