1. Break-Even and Cost-Volume-Profit Analysis
Chapter 24

2. Break-even Analysis
Determines at what level cost and revenue are in equilibrium
Break-even point
Obtained directly by mathematical calculations
Usually presented in graphic form known as break-even chart

3. Determining the Break-Even Point
Each expense must be analyzed to determine its fixed and variable portions
Semi-variable expenses must be separated into their fixed and variable components
Fixed portion is stated as a total figure
Variable portion is stated as a rate or percentage

4. Determining the Break-Even Point
Break-even analysis may be based on
Historical data
Future sales and costs

5. Determining the Break-Even Point
Contribution margin ratio (C/M ratio)
Also known as marginal income ratio or Profit-volume ratio
Contribution of each dollar towards covering fixed costs and making a profit
Contribution margin ratio = 1 – (Variable costs/Sales) OR
Contribution margin ratio =
unit contribution margin/unit sales price
Contribution margin= sales – variable costs

6. 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

7. Income Statement Sales xxx Less variable expenses xxx
Total contribution margin xxx
Less fixed expenses xxx
Profit xxx

8. Determining the Break-Even Point
Break-even = Fixed costs
sales volume ($) Contribution margin ratio
sales volume ($) – (Variable costs/Sales)

9. Determining the Break-Even Point
Break-even = Fixed costs
sales in units Contribution margin/unit
Break-even = Break-even sales in dollars
sales in units Unit sales price

10. 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

11. Equation Approach Profit=
Sales revenue-variable expenses-fixed expenses
(Unit sales price)*(sales volume)- (unit variable expenses)*(sales volume)-(Fixed expenses)

12. Determining the Break-Even Point
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

13. Break even Chart

14. Break even Chart Changes in Fixed expenses
Original estimate new estimate
Fixed utilities expenses $1, $2,600
Total Fixed expenses 48, ,200
Breakeven calculation 48, ,200
(FC/unit contribution margin) $ $6
Break even point(units) 8,000units ,200 units
Break even point (dollars) $128, $131,200

15. Break even Chart Change in unit variable expenses
Increase in unit variable expenses will cause a decrease in unit contribution margin.
Break even will now be achieved at a higher output level.

16. Break even Chart Change in sales price
Increase in sales price will cause an increase in unit contribution margin.
Break even will now be achieved at a lower output level.
However, careful analysis by the management is required as the increase in sales price might also cause a decline in output sold.

17. Profit-Volume Analysis

18. Target Net Profit
We can use break-even analysis to find the sales required to reach a target level of profit.
Number of sales units required to earn target profit:
= Fixed expenses+ Target net profit
Unit contribution margin

19. Example
Calculate the number of units the company needs to sell in order to realize a Profit of $500,000?
Given:
Fixed costs= $100,000
Sale price= $10
Variable cost per unit= $5

20. 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