This portion of the assignment is fairly straightforward. The key is to address the three bullet points in each answer using the course text. Outside sources may not lead you toward addressing the three bullet points.
Week 3 Part 2
This portion of the assignment requires an understanding of break-even analysis. You are calculating the number of units sold (or sales dollars) for a problem. Use the following formulas:
#1 Units Sold = (Fixed Expenses + Operating Income) / Contribution Margin Per Unit
#2 Sales $ = (Fixed Expenses + Operating Income) / Contribution Margin Ratio
#3 Units Sold = (Fixed Expenses + Operating Income) / Contribution Margin Per Unit
Break-even Volume = Fixed Costs / Contribution Margin Per Unit
This "shortcut" is a little misleading. The formula will give you the right answer. But, it makes certain assumptions about costs and the contribution margin. Part of the concept is the break-even point is 0 (there is no profit or loss). Therefore, Operating Income at the break-even point is considered 0. That's partly why the "shortcut" only shows Fixed Costs. But if there is a target profit amount, you must add the fixed costs to the target amount (as Operating Income) to get the numerator. So, use formulas #1, #2, and #3 as presented above.
Note: contribution margin = price per unit - variable cost per unit
Example:
Betty has a donut shop. She wants to calculate the break-even point for the month. The lease and equipment costs are the fixed costs. Betty's fixed costs each month are $1,200.
Betty can make about $6 per box of donuts (her contribution margin). How many boxes of donuts does she need to sell to break even in the month?
BE = (Fixed Expenses + Operating Income) / Contribution Margin Per Unit
BE = (1200 + 0) / 6
BE = 1200/6
BE = 200
Think about it. She has to sell 200 boxes of donuts to break even. That's enough to cover all costs (fixed and variable). Fixed costs are in the numerator; while variable costs are in the denominator's contribution margin.
Now, let's say her contribution margin varies because sometimes a box contains 13 donuts; sometimes the box contains 8 donuts (depending on what the customer orders). This variation is a little
unpredictable. So, Betty decides to average the contribution margin by using a percentage. Let's say her percentage ratio (contribution margin ratio) is 30% on each box of donuts. How many donuts (in dollars) does she have to sell to reach the break-even point? We'll use the same $1,200 in fixed expenses.
BE$ = (Fixed Expenses + Operating Income) / Contribution Margin Ratio
BE$ = (1200 + 0) / 30%
BE$ = 1200 / 0.30
BE$ = $4,000
She has to sell $4,000 worth of donuts to break even.
Side Note: If she needs 200 boxes to break even, and the $ value is $4,000 for break-even, how much is she selling donuts for? $20 a box. Must be some fancy donuts!
What if she wants to make $3,000 in profits? We'll assume she's still making $6 per box of donuts.
= (Fixed Expenses + Operating Income) / Contribution Margin Per Unit
= (1,200 + 3,000) / 6
= 700 boxes
Betty will need to sell 700 boxes of donuts in order to cover all costs and make a $3,000 profit. That's more than three times the amount to break even!
Another Side Note: If her box of donuts sells for $20 and she's making $6 on each box sold, this means her costs are $14 per box. She really should figure out a way to reduce her costs, especially variable costs.
Week 3 Part
This portion of the assignment should look quite familiar. You are calculating the PV and FV in a scenario.
Last week, we were making calculations on a fixed amount. If you'll recall, the Excel solution was to include a 0 or blank in the pmt amount. The difference, now, is you are including payments. So, when you make your calculations in Excel, be sure to include pmt as a negative number (cash outflow).
Another critical point to getting the right answers is understanding the difference between an ordinary annuity and an annuity due. For that, you'll need to refer to the text. Additionally, you'll need to set the [type] variable in the Excel equation to 1.
Example:
Marcus wants to save for college. He decides he's going to put away $200 each month in a money market account that draws 5% annually. To open the account, he puts his first $200 in right now. He plans to start college in 5 years. How much money will he have for college?
n = number of payments (monthly for 5 years = 5 x 12 = 60)
i = interest rate (5% annually) We're calculating payments by 12. So, we have to calculate interest by 12. (5% / 12 = 0.417% per month)
pmt = -200
Using Excel, we're calculating FV. The first thing to consider is the interest rate. If you use % format and divide 5% by 12, you're likely to get 0% as the answer. You can either format that percentage to two (or three) decimals or use the decimal equivalent:
0.00416667. OK; let's keep going. Here are your numbers for Excel:
=FV(rate, nper, pmt, [pv], [type])
=FV(0.00416667, nper, pmt, [pv], [type])
=FV(0.00416667, 60, pmt, [pv], [type])
=FV(0.00416667, 60, -200, [pv], [type]) If the payments are -200, what do we put as the PV? Nothing; just leave it blank.
=FV(0.00416667, 60, -200, ,1) Set type to 1 to represent the first -200 installment.
FV = $13,657.89
Marcus will have $13,657.89 for college. That might pay for the first year of college (depending on where he goes).
If you used the percentage format (0.417%), then simply click on that cell when you get to rate.
Hopefully, you'll find this guidance helpful. Let me know if you have questions
