9.3. Answering Two Critical Profit Questions

If you were the manager of a profit center and you had just received the latest P&L report (see Figure 9-1), you should immediately ask yourself two 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 ...

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