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How Many Days of Hire are Needed to Break Even this Year? - Company Operational Fixed Cost: Salaries - $1
How Many Days of Hire are Needed to Break Even this Year?
- Company Operational Fixed Cost:
Salaries - $1.2 million
Office/Structure - $600,000
Misc - $700,000
- Debt Fixed Cost (Debt servicing & Insurance Coverage) :
$11,000/day based on one year deb service
- Variable Costs (Food/Gas) :
$1,500 per day
- $22,000 daily rate (market decides that rate)
Expert Solution
Days of Hire required to achive Break even = Total Annual Fixed Cost/ Daily Contribution Margin.
| Calculation of Total Annual Fixed Cost | |
| salaries | $1,200,000 |
| Office expenes | $600,000 |
| Misc Expenses | $700,000 |
| Debt fixed cost($11000*365) | $4,015,000 |
| Total annual fixed cost | $6,515,000 |
| Calulation Of daily contribution Margin | |
| Daily Hire rate | $22,000 |
| Less-Variable cost | $1,500 |
| Contribution margin per day | $20,500 |
Days of Hire required to achive Break even = $6,515,000/$20500 = 317.80 days or 318 days.
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Proof
| Income statement at 318 days of hire | ||
| Income from Hire($22000*318 days) | $6,996,000 | |
| Less- | Variable cost($1500*318 days) | $477,000 |
| Contribution margin | $6,519,000 | |
| Less- | Fixed Costs | $6,515,000 |
| Net income | $4,000 |
| Income statement at 317 days of hire | ||
| Income from Hire($22000*317 days) | $6,974,000 | |
| Less- | Variable cost($1500*317 days) | $475,500 |
| Contribution margin | $6,498,500 | |
| Less- | Fixed Costs | $6,515,000 |
| Net income(loss) | -$16,500 |
As we can see in case of 318 days of hire there is a nominal profit of $4000.
And in case of 317 days of hire there is a Loss of $16500.
Hence to achive the breakeven point, total days of hire need to be 318 days in a year.
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