Question 12.A.5: Calculating the EBIT Break-Even Point PROBLEM: Calculate th...
Calculating the EBIT Break-Even Point
PROBLEM: Calculate the expected accounting operating profit break-even number of house calls per month for the in-home computer-support business after six months of operation.
APPROACH: Use Equation 12.6 to calculate EBIT break-even for the business.
EBIT \ break-even=\frac{FC+D\&A}{Price-Unit \ VC} 12.6
From Learning by Doing Application 12.1, we know that the monthly fixed cost (FC) is $3,000, the monthly D&A is $1,000, the average revenue per house call (Price) is $70, and the variable cost per house call (Unit VC) is $20. Therefore, using Equation 12.6, we find that the accounting operating profit break-even point after six months is:
EBIT \ break-even=\frac{FC+D\&A}{Price-Unit \ VC}=\frac{\$3,000+\$1,000}{\$70-\$20}=80 \ house \ calls \ per \ monthYour company must make 80 house calls per month to break even on an accounting operating profit basis.
By comparing this calculation and the calculation in Learning by Doing Application 12.4 , you can see that the accounting operating profit break-even point (80 house calls) is higher than the pretax operating cash flow break even point (60 house calls). As we explained in the text, this is so because D&A is included in the accounting operating profit break-even calculation.