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    Management Accounting: Breakeven Analysis

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    lakshmi aparna yelganamoni
    The document defines breakeven analysis and provides examples of how to calculate breakeven points. It explains that the breakeven point is the sales volume or revenue amount where total costs equal total revenue, resulting in zero profit. The key terms include contribution margin, fixed costs, and variable costs. Formulas show that breakeven point is calculated as fixed costs divided by the contribution margin per unit. Examples demonstrate how to calculate breakeven points and margins of safety using given cost and sales data.

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    Management Accounting: Breakeven Analysis

    Uploaded by

    lakshmi aparna yelganamoni
    96 views27 pages
    The document defines breakeven analysis and provides examples of how to calculate breakeven points. It explains that the breakeven point is the sales volume or revenue amount where total costs equal total revenue, resulting in zero profit. The key terms include contribution margin, fixed costs, and variable costs. Formulas show that breakeven point is calculated as fixed costs divided by the contribution margin per unit. Examples demonstrate how to calculate breakeven points and margins of safety using given cost and sales data.

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    The document defines breakeven analysis and provides examples of how to calculate breakeven points. It explains that the breakeven point is the sales volume or revenue amount where total costs equal total revenue, resulting in zero profit. The key terms include contribution margin, fixed costs, and variable costs. Formulas show that breakeven point is calculated as fixed costs divided by the contribution margin per unit. Examples demonstrate how to calculate breakeven points and margins of safety using given cost and sales data.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    96 views27 pages

    Management Accounting: Breakeven Analysis

    Uploaded by

    lakshmi aparna yelganamoni
    The document defines breakeven analysis and provides examples of how to calculate breakeven points. It explains that the breakeven point is the sales volume or revenue amount where total costs equal total revenue, resulting in zero profit. The key terms include contribution margin, fixed costs, and variable costs. Formulas show that breakeven point is calculated as fixed costs divided by the contribution margin per unit. Examples demonstrate how to calculate breakeven points and margins of safety using given cost and sales data.

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    © All Rights Reserved
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    of 27

    Management Accounting

    Breakeven Analysis
    Breakeven Analysis Defined
     Break even point-the point at which a company makes
    neither a profit or a loss.
     The break-even point (BEP) represents the sales amount—in
    either unit (quantity) or revenue (sales) terms—that is
    required to cover total costs, consisting of both fixed and
    variable costs to the company.
     Total profit at the break-even point is zero.
     Once they surpass the break-even price, the company can
    start making a profit.
     Also known as C-V-P analysis (Cost Volume Profit Analysis)
    Breakeven Chart
    Key Terminology: Breakeven
    Analysis
     Contribution per unit-the sales price minus the variable
    cost per unit. It measures the contribution made by each
    item of output to the fixed costs and profit of the
    organisation.
     It represents the incremental money generated for each
    product/unit sold after deducting the variable portion of
    the firm's costs.
     To illustrate, assume a company sells product
    for $50 per unit, variable cost is $20 per unit,
    and fixed costs are $60,000 per month
     In our example, Contribution margin per unit
    is the difference between selling price and
    variable cost per unit: $50 − $20 = $30
    Breakeven Formula
    Fixed Costs
    *Contribution per unit

    *Contribution per unit = Selling Price per unit – Variable Cost per unit

     What level of sales are necessary to cover the


    company's total fixed costs.
    Breakeven Formula
     BEP= $60,000/ $30
    = 2,000 units
    Breakeven Analysis Defined
     To illustrate, assume a company sells 2,000 units of
    its only product for $50 per unit, variable cost is $20
    per unit, and fixed costs are $60,000 per month.
    Given these conditions, the company is operating at
    the breakeven point
     Revenues, 2,000 × $50 $100,000
    Deduct: Variable costs 2,000 × $20 40,000
    Fixed costs 60,000
    Operating income 0
     Contribution margin in percentage:
     Contribution margin per unit divided by selling
    price: $30 ÷ $50 = 60%
     BEP= 60,000/ .60
     BEP= 1,00,000
    CVP Analysis/Target Profits
     CVP analysis considers a broader question: What
    amount of sales in units or in revenues is needed to
    achieve a specified target operating income?
     What if a firm doesn’t just want to breakeven – it
    requires a target profit
     Contribution per unit will need to cover profit as
    well as fixed costs
     Required profit is treated as an addition to Fixed
    Costs
    Breakeven Formula
     The answer is easily obtained by adding target
    operating income to total fixed costs in the
    numerator of the formulas above. Assuming
    target operating income (TOI) is $15,000
     Unit sales to achieve TOI
    = $60,000+$15000/ $30
    = 2,500 units
    Example 2
    Using the following data, calculate the level of
    sales required to generate a profit of €10,000:
     Selling Price = €35

     Variable Cost = €20

     Fixed Costs = €50,000


    Example 2: Solution
     Contribution = €35 – €20 = €15
     Level of sales required to generate profit of
    €10,000:
    €50,000 + €10,000
    €15
    4000 units
    Margin of Safety
     Margin of safety-a measure in which the budgeted
    volume of sales is compared with the volume of
    sales required to break even
     The difference between budgeted or actual sales and
    the breakeven point
     The margin of safety may be expressed in units or
    revenue terms
     Shows the amount by which sales can drop before a
    loss will be incurred
    Example 1
    Using the following data, calculate the
    breakeven point and margin of safety in units:
     Selling Price = €50

     Variable Cost = €40

     Fixed Cost = €70,000

     Budgeted Sales = 7,500 units


    Example 1: Solution
     Contribution = €50 - €40 = €10 per unit
     Breakeven point = €70,000/€10 = 7,000 units
     Margin of safety = 7500 – 7000 = 500 units
    Example
     In its budget for next month, ABC Company has
    revenues of $500 variable costs of $350, and fixed
    costs of $135.
    a. Compute contribution margin percentage.
    b. Compute total revenues needed to break even.
    c. Compute total revenues needed to achieve a target
    operating income of $45
     A. Contribution margin percentage
    = ($500 − $350) ÷ $500
    = $150 ÷ $500
    = 30%
     B. Breakeven point = $135÷ 0.30
    = $450
     Proof of breakeven point:
     Revenues $450
     Variable costs, $450,000 × 0.70 - 315
    Fixed costs - 135
     Operating income $0
     Total revenues needed to achieve target
    operating income of $45
     X= $135 +$45/ 0.30
    =$180/0.30
    =$600
    Practice Problem
     A company sells water bottle at average selling price of Rs.
    15 and the average variable cost of Rs. 9. Compute the
    following:
     Suppose the fixed costs of operating the company is Rs.
    100,000 per year. Find Break even point in units.
     If the owner desired a profit of Rs. 25,000, what will be
    break-even point?
     If fixed costs rose to Rs. 110,000, break-even in unit’s
    volume would be?
     If the average selling price rose to Rs.16, what would be the
    break even volume?
     The average selling price is Rs. 15 and the average
    variable cost is Rs. 9. Thus, every time the store
    sells a shirt it has Rs. 6 remaining after it pays the
    manufacturer. This Rs. 6 is referred to as the unit
    contribution.
     BEP = Fixed Cost/ Contribution per unit
     BEP= 100000/ 6
     BEP= 16,666.66
     BEP= 16,667 Water bottles
     BEP= Fixed Cost +Profit/ Contribution per unit
     BEP= 100000+25000/6
     BEP=125000/6
     BEP= 20833.33
     BEP 20833 Water bottles
     BEP = Fixed Cost/ Contribution per unit
     BEP= 110000/ 6
     BEP= 18333.33
     BEP= 18333 Water bottles
     BEP = Fixed Cost/ Contribution per unit
     BEP= 100000/ 7
     BEP= 14285.71
     BEP= 14286 Water bottles
    Uses of Breakeven Analysis
     C-V-P analysis is an important tool in terms of
    short-term planning and decision making
     It looks at the relationship between costs, revenue,
    output levels and profit
     Short run decisions where C-V-P is used include
    choice of sales mix, pricing policy etc.
     How many units must be sold to breakeven?
     How many units must be sold to achieve a target
    profit?
     Should a special order be accepted?
    Reading
    Cost Accounting – A Managerial Emphasis-
    Charles T Horngren, Srikant M Datar and
    Madahav V Rajan, 14th Edn, Pearson

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