Breakeven Analysis

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Breakeven Analysis Defined
Breakeven analysis examines the short run
relationship between changes in volume and
changes in total sales revenue, expenses and
net profit
Also known as C-V-P analysis (Cost Volume
Profit Analysis)

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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.

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Decision making and Breakeven Analysis: Examples

How many units must be sold to

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Key Terminology: Breakeven Analysis
Break even point-the point at which a
company makes neither a profit or a loss.
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.

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Key Terminology ctd.
Margin of safety-a measure in which the
budgeted volume of sales is compared
with the volume of sales required to break
even
Marginal Cost – cost of producing one
extra unit of output

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Breakeven Formula
Fixed Costs
*Contribution per unit

*Contribution per unit = Selling Price per unit –

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Breakeven Chart

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The Breakeven Equation
Revenue – Costs = Profit

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 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit

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 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost

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 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
Revenue = #Units Sold * Selling Price $/Unit
Variable Cost = #Units Sold * Variable Cost $/Unit

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 Graphic Depiction of Breakeven
$

Units Sold 13
 Graphic Depiction of Breakeven
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 Graphic Depiction of Breakeven
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 Graphic Depiction of Breakeven
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 Graphic Depiction of Breakeven
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 Graphic Depiction of Breakeven
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 Graphic Depiction of Breakeven
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1. Pepsi Company produces a single article.
Following cost data is given about its product:‐
Selling price per unit Rs.40
Marginal cost per unit Rs.24
Fixed cost per annum Rs. 16000 Calculate:
(a)P/V ratio
(b) break even sales
(c) sales to earn a profit of Rs. 2,000
(d) Profit at sales of Rs. 60,000
(e) New break even sales, if price is reduced
by 10%.
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We know that- (S‐v) /S= F + P
OR
s x P/V Ratio = Contribution
So,
(A) P/V Ratio = Contribution/sales x100
= (40‐24)/40 x 100 = 16/40 x 100 OR 40%

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(B) Break even sales = S x P/V Ratio = Fixed Cost
(At break even sales, contribution is equal to fixed cost)
Putting this values: s x 40/100 = 16,000
S = 16,000 x 100 / 40 = 40,000 OR 1000 units

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(C) The sales to earn a profit of Rs. 2,000
S x P/V Ratio = F + P
Putting this values: s x 40/100 = 16000 + 2000 S = 18,000 x
100/40
S = Rs. 45,000OR 1125 units

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(D)Profit at sales of 60,000
S x P/V Ratio = F + P
Putting this values: Rs. 60,000 x 40/100 = 16000
+ P 24,000 = 16000 + P 24,000 – 16,000 = P
8,000

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(E) New break even sales, if sale price is reduced by10%
New sales price = 40‐10% = 40‐4 = 36
Marginal cost = Rs. 24
Contribution = Rs. 12
P/V Ratio = Contribution/Sales = 12/36 x100 OR
33.33% Now, s x P/V Ratio = F
\ (at B.E.P. contribution is equal to fixed cost)
S x 100/300 = Rs.16000
S = 16000 x 300/100
S= Rs.48,000

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Margin of Safety
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

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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

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Example 1: Solution
Contribution = €50 - €40 = €10 per unit
Breakeven point = €70,000/€10 = 7,000 units
Margin of safety = 7500 – 7000 = 500 units

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Target Profits
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

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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

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Example 2: Solution
Contribution = €35 – €20 = €15
Level of sales required to generate profit of
€10,000:
€50,000 + €10,000
€15
4000 units

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Limitations of B/E analysis
Costs are either fixed or variable
Fixed and variable costs are clearly
discernable over the whole range of
output
Production = Sales
One product/constant sales mix
Selling price remains constant
Efficiency remains unchanged
Volume is the only factor affecting costs

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Absorption and Marginal Costing
Compared
Absorption Marginal
 Fixed costs included in
Fixed costs not
Product Cost
 FC not treated as period included in Product
cost – closing/opening Cost
stock values FC treated as period
 Under/over absorption of cost
costs No under/over
 Complies with Financial
Accounting standards
absorption of costs
Does not comply with
Financial Accounting
standards
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