Introduction to Net Income and Sales Volumes
Introduction
Here we will look at the effects of changes in selling price, fixed costs, and variable costs on the net income and break-even point.
The use of graphs can also help us with break-even analysis.
We usually call the graph showing the total revenue and the total cost graphs together a break-even chart.
This chart is an easy visual way to analyze the financial position of a business for different number for units
sold (sales volume) or produced (volume of output).
We can see at a glance the amount of profit or loss that is generated for different levels of sales or production.
Net Income and Sales Volume
The unit variable costs are $30. The selling price of the unit is $60.
The capacity for the period is 200, and the fixed costs are $3000.
Question: What is the net income at a sales volume of:
Scenario 1: $4200?
Solution:
TR equation is used to find the number units Q for a sales volume of $4200.
A sales volume of $4200 means that the total revenue is $4200.
TR = 60Q ⇒ 4200 = 60Q ⇒ Q = 70 units
The graph below shows the drawing of both equations: TR and TC:
The next graph shows that based on the current situation, the business is incuring a loss of $900.
Scenario 2: $9600?
Solution:
TR equation is used to find the number units Q for a sales volume of $9600.
A sales volume of $4200 means that the total revenue is $9600.
TR = 60Q ⇒ 9600 = 60Q ⇒ Q = 160 units
The graph below shows the drawing of both equations: TR and TC:
The next graph shows that based on the current situation, the business is incuring a profit of $1800.
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