Break-Even and Cost-VolumeProfit Analysis
Chapter 24
Break-even Analysis
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
Determines at what level cost and
revenue are in equilibrium
Break-even point
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
Obtained directly by mathematical
calculations
Usually presented in graphic form known
as break-even chart
Determining the Break-Even Point
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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
Determining the Break-Even Point

Break-even analysis may be based on
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
Historical data
Future sales and costs
Determining the Break-Even Point

Contribution margin ratio (C/M ratio)
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
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
Example

The ABC Lodge has sales of $4500,000.
The fixed expense was $1,200,000 and the
variable expense totaled $1,800,000.

Contribution margin ratio
Contribution margin

Income Statement
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Sales
Less variable expenses
Total contribution margin
Less fixed expenses
Profit
xxx
xxx
xxx
xxx
xxx
Determining the Break-Even Point
Break-even
=
sales volume ($)
Break-even
=
sales volume ($)
Fixed costs
Contribution margin ratio
Fixed costs
1 – (Variable costs/Sales)
Determining the Break-Even Point
Break-even
sales in units
=
Fixed costs
Contribution margin/unit
Break-even
sales in units
=
Break-even sales in dollars
Unit sales price
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
Equation Approach

Profit=
Sales revenue-variable expenses-fixed expenses

Profit=

(Unit sales price)*(sales volume)- (unit variable
expenses)*(sales volume)-(Fixed expenses)
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
Break even Chart
Break even Chart

Changes in Fixed expenses

Original estimate
Fixed utilities expenses
$1,400
Total Fixed expenses
48,000
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new estimate
$2,600
49,200
Breakeven calculation
48,000
(FC/unit contribution margin) $6
49,200
$6
Break even point(units)
Break even point (dollars)
8,200 units
$131,200
8,000units
$128,000
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.
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.
Profit-Volume Analysis
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

Example
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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
Constructing a Break-even Chart

Example:
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Fixed costs = $1,600,000
Sales = $5,000,000
Sales/unit = $4
Variable cost/unit = $2.4/unit
Construct Break-even chart