9.3. Answering Two Critical Profit Questions
How did I make $1.5 million profit (operating earnings before interest and income tax) in 2009?
Why did my profit increase $215,650 over last year ($1,500,000 in 2009 - $1,284,350 in 2008 = $215,650 profit increase)?
9.3.1. How did you make profit?
Actually, you can answer this profit question three ways (see Figure 9-1 for data):
Answer # 1: You earned total margin that is more than fixed expenses.
You earned $25 profit margin per unit and sold 100,000 units; therefore:
$25 unit margin × 100,000 units sales volume = $2,500,000 margin
Your profit center is charged with $1 million total fixed expenses for the year ($750,000 direct plus $250,000 allocated fixed costs); therefore:
$2,500,000 margin - $1,000,000 fixed operating expenses = $1,500,000 operating profit
Answer # 2: Your sales volume exceeded your break-even point.
Your break-even point is the sales volume at which total margin exactly equals total fixed expenses. Your break-even point for 2009 was:
$1,000,000 total fixed expenses for year ÷ $25 margin per unit = 40,000 units sales volume break-even point
Your actual sales volume for the year was 100,000 units, or 60,000 units in excess of your break-even point. Each unit ...