Breakeven Analysis (1)

7/27/2019 Breakeven Analysis (1)

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Break-Even and Cost-Volume-Profit Analysis

Chapter 8


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Break-even Analysis

Determines at what level cost andrevenue are in equilibrium

Break-even point Obtained directly by mathematical

calculations

Usually presented in graphic form knownas break-even chart


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Determining the Break-Even Point

Each expense must be analyzed todetermine its fixed and variable portions

Semi-variable expenses must be separatedinto their fixed and variable components

Fixed portion is stated as a total figure Variable portion is stated as a rate or

percentage


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Break-even analysis may be based on

Historical data

Future sales and costs


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Contribution margin ratio (C/M ratio) Also known as marginal income ratio orProfit-volume

ratio

Contribution of each dollar towards covering fixed costsand making a profit

Contribution margin ratio = 1 (Variable costs/Sales)

ORContribution margin ratio =

unit contribution margin/unit sales price

Contribution margin= sales

variable costs


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Example

The ABC Lodge has sales of$4500,000.The fixed expense was $1,200,000 and the

variable expense totaled $1,800,000.

Contribution margin ratio

Contribution margin


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Income Statement

Sales xxx

Less variable expenses xxx

Total contribution margin xxx

Less fixed expenses xxx

Profit xxx


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Break-even = Fixed costs

sales volume ($) Contribution margin ratio


sales volume ($) 1 (Variable costs/Sales)


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sales in units Contribution margin/unit

Break-even = Break-even sales in dollars

sales in units Unit sales price


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Example

The ABC Lodge has sales of$4500,000.The fixed expense was $1,200,000 and the

variable expense totaled $1,800,000.

Break even point in dollars


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Equation Approach

Profit=Sales revenue-variable expenses-fixed expenses

Profit=

(Unit sales price)*(sales volume)- (unit variableexpenses)*(sales volume)-(Fixed expenses)


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Break-even capacity %age =

Break-even sales in dollars

Normal sales volume in dollars

Margin of Safety ratio =

Sales Break-even sales

Sales

Profit % = CM ratio x Margin of safety ratio


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Break even Chart


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Break even Chart

Changes in Fixed expenses Original estimate new estimate

Fixed utilities expenses $1,400 $2,600 Total Fixed expenses 48,000 49,200

Breakeven calculation 48,000 49,200

(FC/unit contribution margin) $6 $6

Break even point(units) 8,000units 8,200 units

Break even point (dollars) $128,000 $131,200


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Break even Chart

Change in unit variable expenses

Increase in unit variable expenses will

cause a decrease in unit contributionmargin.

Break even will now be achieved at a higheroutput level.


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Break even Chart

Change in sales price

Increase in sales price will cause anincrease in unit contribution margin.

Break even will now be achieved at a loweroutput level.

However, careful analysis by themanagement is required as the increase insales price might also cause a decline inoutput sold.


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Profit-Volume Analysis


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Target Net Profit

We can use break-even analysis to find thesales required to reach a target level ofprofit.

Number of sales units required to earntarget profit:

= Fixed expenses+ Target net profitUnit contribution margin


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Example

Calculate the number of units the companyneeds to sell in order to realize a Profit of

$500,000? Given:

Fixed costs= $100,000

Sale price= $10

Variable cost per unit= $5


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Constructing a Break-even Chart

Example:

Fixed costs = $1,600,000

Sales = $5,000,000

Sales/unit = $4

Variable cost/unit = $2.4/unit

Construct Break-even chart

Breakeven Analysis (1)

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