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Mathematical Method
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In order to calculate the break-even point of a business mathematically, it is necessary to determine the gross income percentage of the business or marginal income per unit.
Example:
The marginal income ratio is calculated as follows:
Marginal income ratio = marginal income ÷ income
R80 000 ÷ 200 000 = 0.4 or 40%
The ratio can now be used to calculate the break-even point.
Break-even point in units = Tot fixed cost ÷ marginal income per unit
= R20 000 ÷ R0.80 = 25 000 units
Break-even point in rand = Tot fixed cost ÷ marginal income
= R20 000 ÷ 40% = R50 000.00
Jimco Ltd. BALANCE SHEET December 31, 1981(Thousands of Rands)
|
Current assets: |
|
|
Cash |
1 400 |
|
Marketable securities (market value, R320) |
300 |
|
Account receivable |
10 000 |
|
Inventories |
12 000 |
|
Prepaid expenses |
300 |
|
Total current assets |
24 000 |
|
|
|
|
Fixed assets: |
|
|
Land |
2 000 |
|
Plant and equipment |
12 300 |
|
Less: Accumulated depreciation |
7 300 |
|
Net plant and equipment |
5 000 |
|
Total fixed assets |
7 000 |
|
Total assets |
31 000 |
|
LIABILITIES |
|
|
Current liabilities: |
|
|
Accounts payable |
3 000 |
|
Notes payable, 9%, March 1, 1982 |
3 400 |
|
Accrued salaries, wages and other expenses |
3 100 |
|
Current portion of long term debt |
500 |
|
Total current liabilities |
10 000 |
|
|
|
|
Non-current liabilities: |
|
|
Deferred income taxes |
1 500 |
|
First mortgage bond, 7%, due January 1, 1995 |
6 300 |
|
Debentures, 8.5%, due June 30, 1991 |
2 900 |
|
Total long-term liabilities |
10 700 |
|
|
|
|
Owner’s equity |
|
|
Common stock (par value R 1.00) |
100 |
|
Additional paid-in capital |
2 000 |
|
Retained earnings |
8 200 |
|
Total owner’s equity |
10 300 |
|
Total liabilities and owner’s equity |
31 000 |
Income statement for Jimco for the year ended December 31, 1981(Thousands of Rands)
|
Net sales |
|
51 000 |
|
Cost of goods sold |
|
(38 000) |
|
Gross profit |
|
13 000 |
|
|
|
|
|
Operating expenses |
|
|
|
Selling expense |
3 100 |
|
|
Depreciation expense |
500 |
|
|
General and administrative expense |
5 400 |
(9 000) |
|
Net Operating Income ( |
|
4 000 |
|
|
|
|
|
Interest expense |
|
(1 000) |
|
Earnings before taxes (EBT) |
|
3 000 |
|
|
|
|
|
Income taxes |
|
(1 200) |
|
Net income (NI) |
|
1 800 |