Solver Method for Break-Even Point

Solver Method for Break-Even Point

The linkage established in Figure 10-5 between the total operating revenues (Cell B4) and the unit selling price and number of units sold (Cells B32 and B33) can now be exploited to determine the break-even

326 ❧ Corporate Financial Analysis with Microsoft Excel ®

Begin by copying Figure 10-5 to a new worksheet and delete Rows 35 and 36 for the algebraic method. Label the new worksheet Figure 10-6. Access the Solver tool by clicking on Solver on the Tools menu. Figure 10-7 shows the Solver dialog box with the settings. The target cell is B15 (which is the EBIT) and is to be set equal to zero by changing Cell B33 (the number of units that must be sold for breaking even). When these settings are executed, Solver returns the results shown in Figure 10-6.

Figure 10-6

Income Statement at the Break-Even Point (Value of Break-Even Point Determined with Excel’s Goal Seek Tool)

1 ABC COMPANY

Income Statement at the Break-Even Point for the Year Ended 2 December 31, 20X2

3 Dollar values are in $ thousand except for per share and per unit values.

4 Total Operating Revenues (or Total Sales Revenues)

5 Less: Cost of Goods Sold (COGS)

6 Gross Profits

7 Less: Operating Expenses

8 Selling Expenses

9 General and Administrative Expenses (G&A)

10 Depreciation Expense

11 Fixed Expenses

EBIT = 0 at the

12 Total Operating Expenses

break-even point.

13 Net Operating Income

14 Other Income

15 Earnings before Interest and Taxes (EBIT)

16 Less: Interest Expense

17 Interest on Short-Term Notes

18 Interest on Long-Term Borrowing

19 Total Interest Expense

20 Earnings before Taxes (EBT)

21 Less: Taxes (rate = 40%)

24 Total Taxes (rate = 40%)

25 Earnings after Taxes (EAT)

26 Less: Preferred Stock Dividends

27 Net Earnings Available for Common Stockholders

28 Earnings per Share (EPS), 100,000 shares outstanding

29 Retained Earnings

30 Dividends Paid to Holders of Common Stock

31 Added Information

32 Unit Selling Price

Solver solution for the

33 Number of Units Sold

break-even point

34 COGS, as Percent of Sales

Solver Settings

Target Cell is B15, to be set equal to zero by changing Cell B33.

Profit, Break-Even, and Leverage ❧ 327 Figure 10-7

“Solver Parameters” Dialog Box with Settings for Determining the Number of Units to Break Even (i.e., EBIT = 0)

The break-even point is 45,965 units (Cell B33, Figure 10-6), the same as with the algebraic solution (Cell B35, Figure 10-5). Note, however, that other values on the spreadsheet have changed to correspond to their values at the break-even point. For example, the sales revenues for breaking even is $1,183,600 (Cell B4, Figure 10-6), the same as with the algebraic solution (Cell B36, Figure 10-5).

The Solver solution of Figure 10-6 gives additional information on the Income Statement at the break-even point, such as the cost of goods sold (Cell B5), net operating income (Cell B13), and earnings before taxes (Cell B20). Although EBIT equals zero, interest expenses result in a loss for the company, as shown by the negative value for EBT in Cell B20.

Clearly, simply “breaking even” is not a satisfactory goal for the company. In fact, if breaking even is equated to setting the EBIT equal to zero, the ABC Corporation actually loses money at the break-even point. And if the company maintains its policy for retaining $220,000 of earnings, there are no funds available for distribution to holders of common stock, as indicated by the negative value in Cell B30.