Verizon Communications: Breakeven Analysis

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Break even analysis refers to a cost model where total revenue equals the total cost. At this point, the business neither makes profit nor loss. This model will therefore enable the business to determine the point at which they will produce to maximize on revenue at the same time minimize on costs.

Considering Verizon Communications Limited case, the company has various cost centers which are also the products the company deals in. These include land line services, optical fiber line services, long distance services, voicemail, wireless, data, video and Verizon Voice Wing services. If we consider the land line product as a cost centre, then we can allocate costs and income to it. To analyze the break even for this cost centre, we can consider one client to whom the services are offered to.  Let us assume the following data in for a period of one month reference to land line as a cost centre of the company.

Item                                                Amount in Dollars

Price charged per month to one client             40

Direct material cost                                           9

Direct labor                                                       8

Direct Expenses                                                 5                                                     

Direct variable overhead costs                 3

Fixed costs- for one month                                 150,000      

              

The breakeven point can be computed using the formula Fixed Cost/ Contribution. Contribution is calculated by subtracting the total variable costs from the price. In the above case study, price is 40 dollars while the variable costs are 25 dollars computed by adding cost for direct materials, direct labor, direct expenses and direct variable overheads. Therefore the contribution will be given by 40 - (9+8+5+3) which equals to 15 dollars. The breakeven point in units will now be given by getting the quotient of fixed cost and contribution. This will be computed as 100,000 dollars divided by 15 dollars giving a fig of 10,000 units. This can also be presented in monetary terms by multiplying 10,000 units with the unit price of 40 dollars thus resulting in a value of 400,000 dollars.

From the above computations, it can be deduced that Verizon Communications Limited can only produce in excess of 10,000 units in order to make profit. If the company produces exactly 10,000 units, it will neither make profit nor loss whilst if it produces less than 10,000 units, it will make losses. The management accountant for the company may come up with different levels of output to produce in order to maximize revenue. This can be assumed to be 8,000, 10,000 15,000 and 20,000. These different levels of output can be analyzed in the table below in determining their viability and therefore assist the management accountant in adopting the best alternative.

Level of output

8,000

10,000

15,000

20,000

Contribution per unit

15

15

15

15

Total Contribution

120,000

150,000

225,000

300,000

Less Fixed Costs

150,000

150,000

150,000

150,000

Net Profit or Loss

(30,000)

Nil

75,000

150,000

 

From the analysis, it is quite evident that producing less than 10,000 units which is the breakeven point leads to losses, producing 10,000 units results in neither profit nor loss while producing in excess of 10,000 units leads to profits since this is the profit making region for the company.

            Break even analysis can also be analyzed graphically. This can be presented using the chart below which clearly shows the breakeven point, loss making region, profit making region and the margin of safety. From the diagram below, breakeven point in units is given by Xo while breakeven point in monetary terms is given by Yo. The shaded area before Xo shows the loss making region while that after the point Xo shows the profit making region.

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