Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 39

CVP Analysis with Subsidies

Suburban Bus Lines operates as a not-for-profit organization providing local transit service. As a not-for-profit, it refers to an excess of revenues over costs as a “surplus” and an excess of costs over revenues as a “deficit.” Suburban charges $1.00 per ride. The variable costs of a ride are $1.50. The fixed costs of Suburban are $200,000 annually. The county government provides Suburban with a flat subsidy of $250,000 annually.

Required

a. What is the break-even point for Suburban?

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b. Suburban expects 75,000 riders this year. Will it operate at a surplus or deficit?

Step 1 of 3

a.

Sub Bus lines operates is a not for profit organization and providing local transit service. It is charging $1.00 per ride and the variable cost per ride is $1.50. The fixed costs are $200,000. The county government provides with a flat subsidy of $250,000 annually.

Calculate break-even point

Break-even point is the level of operations at which the revenue and total costs (variable costs and fixed costs) become equal. There is no profit or no loss at break-even point level.

Here the organization already recovers its fixed costs of $200,000, because the government is providing a flat subsidy of $250,000. The organization is having a surplus of $50,000 even at zero rides.

The organization charges $1.00 for every ride and the variable cost for each ride is $1.50. It means for each ride, the organization is suffering a deficit of $.50.

If the organization finishes one ride, it will suffer from a deficit of $0.50. Likewise, as long as the number of rides increases, the deficit also increases gradually. It signifies that the point (number of rides) where the deficit equals to the surplus of $50,000 can be treated as break-even point. It means the point where the deficit of $.50 per ride equals to the surplus of $50,000, is called as break-even point.