Objectives
1) Define the term ‘Break-even analysis’;
2) Calculate the contribution per unit, break-even point, total
cost and profit/ (loss) using the calculation and table
methods.
3) Interpret Break-even charts and use these charts to
calculate the break-even point; margin of safety; profit/
(loss) at different production levels
4) Calculate target profit required
5) Use the profit volume ratio to calculate sales revenues at
the break-even point
6) Analyse profit-volume charts
7) Describe the advantages and disadvantages of using
Break-even analysis
8) Discuss when break-even is used
AAT Level 3
Break Even Analysis
Absorption Costing
Direct Materials
+ Direct Labour
+Direct Expenses
+ Production OH *
Absorption Cost
Marginal Costing
£
X
X
X
X
X
* Remember that
Overheads are absorbed
throughout the period
using the OAR
Direct Materials
+ Direct Labour
+Direct Expenses
+ Production OH
Marginal Cost
Marginal Cost
IS
Variable Cost
£
X
X
X
X
X
Chocolate!!!
Example – Manufacturing chocolates
500 units had total variable costs of £1500
Selling price is £6 each = £3000
Fixed costs are £700
Direct Materials
+ Direct Labour
+Direct Expenses
Marginal Cost
Remember that MC is VC!
£
1000
350
150
1500
£
Selling price
3000
Les Variable Costs 1500
Contribution
1500
Fixed Costs
700
Profit
800
Break Even
Where total costs = Total Sales
BE in Units = Fixed Costs
Contribution
BE in Value =
Break Even Point (units) x Selling Price Per Unit
Activity 1
Carl Wright, a market trader, makes and then sells his surfers neckwear for
£19 each. The Variable Cost of producing each item is £14. This is also the
Marginal Cost.
Carl also has Fixed Costs of £200 a week for his sales pitch at an indoor
market.
Calculate the contribution per unit and the break even point.
Calculate the contribution per unit
Calculate the Break Even Point
Selling Price per unit
Variable Cost per unit
Contribution per unit
Total Fixed Costs
Contribution per unit
£19
£14
£5
Break even point in units = 40
£200
£5
= 40 units
Break Even in £ = 40 x £19 = £760
Activity 2
Activity 2 (5) Answer
Units of
output
Fixed
Costs
Variable
costs
Total
Costs
Sales
Revenue
Profit /
(loss)
1000
90,000
9,000
99,000
24,000
(75,000)
2000
90,000
18,000
108,000
48,000
(60,000)
4000
90,000
36,000
126,000
96,000
(30,000)
6000
90,000
54,000
144,000
144,000
0
8000
90,000
72,000
162,000
192,000
30,000
Now try Activity 3
Margin of Safety
Either:
Actual Output – Break Even Point
Or:
In units
Margin of Safety (output)
Output produced
As a %
X
100
Activity 4
a) If Carl produced 70 units his margin
of safety (MOS) would be:
MOS = Actual Output – Break Even Point
BE point (from Activity 1) = 40 units
Output = 70 units
70 – 40 = 30 units
Margin of Safety = 30 units
b) If Carl produced 55 units his margin
of safety would be:
= Actual Output – Break Even Point
BE point = 40
Output = 55
50 – 40 = 15
Margin of Safety = 15 units
c) If Carl produced 60 units his margin
of safety as a percentage would be:
= Actual Output – Break Even Point
BE point (from page 4) = 40
Output = 60
Margin of Safety (output) X 100%
Output
=
20 x 100
60
=
33%
60 – 40 = 20
Margin of Safety = 20 units
d) At an output of 70 units Carls
percentage MOS would be:
= Actual Output – Break Even Point
BE point = 40
Output = 70
70 – 40 = 30
Margin of Safety = 30 units
Margin of Safety (output) X 100%
Output
=
30 x 100
70
=
42.9%
Ian Taylor
Hand-out
Your turn!
Complete activity 6
Activity 7
Price, Porter & Co manufacturer packs of writing equipment for
schools. The annual fixed costs of producing packs are £40,000 and
the variable costs are £3 per pack. The packs sell for £5 each.
a. Calculate the number of packs that the company needs to sell in
order to break-even.
a. How much profit will be made if sales are 35,000 per year?
a. Suppose that fixed costs rise by 50%. Draw the new line for total
cost on your break-even chart and state the new break-even level of
sales.
Targeted/Expected Profit
= Total Fixed Costs + Expected Profit
Contribution per Unit
Selling Price per unit
19
(Activity
1) (Requires
Variable Costs
per unit
14 £200 profit)
Contribution per unit
5
= 200 (FC) + 200 (EP) = 80 units
Total Contribution (80 x 5)
£400
Less fixed costs 5
£200
Profit
£200
Activities 8 - 12
Selling Price per unit
Unit Contribution
Activity 13 – Batman
Robin
Sales&
Revenue
÷ Budgeted Units
= Selling Price – Variable Costs
5000000 ÷ 500000 = £10
Variable Costs per unit
1,000,000+1,250,000+1,500,000 = 3,750,000
Per unit = 3750000 ÷ 500000 = £7.50
Unit Contribution
1,000,000
2.50
400,000
480,000
Break even (units)
= Fixed Costs ÷ Contribution per unit
= 1,000,000 ÷ 2.50
= 400,000 units
= Selling Price – Variable Costs
= £10 - £7.50 = £2.50
Margin of Safety
= Output – Break even output
Question 13 – Batman & Robin
=480000 – 400000 = 80,000 units
1,000,000
2.50
400,000
480,000
80,000
16.67
Margin of Safety as a %
= MOS ÷ Output x 100
= 80,000 ÷ 480,000 x 100
= 16.67%
Complete Robin
Profit Volume Ratio
£ Contribution per Unit x 100
£Selling Price per Unit
Shows contribution per
£ of sales
(%)
Can be converted to a decimal
Profit Volume Ratio
Break even point £ = Fixed Cost
Profit Volume Ratio
Can also be used
for target profit
(just add
targeted profit
to the top line)
Calculated on previous
slide
Question 13: Using the PV ratio, what is the sales
revenue required to break-even?
• Contribution per unit £25
• Selling price per unit £32
• Fixed costs £1100
£ contribution per unit x 100
£ selling price per unit
= 25 X 100
32
= 78.13% or (0.78 as a decimal)
Sales Required to Break Even
=
£ Fixed costs
PVR (decimal)
=
1100
0.78
= £1410
Practice Activities 14 - 17
Activities 16-17 KKQs
Will require some applied thinking!