Break Even (BE) Analysis/ Cost Volume Profit (CVP) Analysis

Key Terms in BE Analysis:

1. Sales Equation
2. Profit
3. Contribution Margin (CM) /Gross Margin
4. CM Ratio/ PV Ratio
5. Variable Cost Ratio
6. BE Point
7. Margin of Safety
8. Target Sales
9. Angle of Incidence
10. Break Even Chart.
Break Even Analysis

A production manger invests him organization resources in a project and expects same level of profit. The expected profit
is referred to as a Target profit. The Break even Analysis can be used to calculate the number of units that must be sold to
produce the target profit.

Using these basic concepts the accountant can provide breakeven and profit information to management to facilitate
planning decisions with cost volume profit necessary to achieve a target profit. Or determine how profits with vary with
changes in sales prices variable expenses or fixed expenses.

(i) Profit (ii) Contribution (iii) Breakeven point (iv) Target profit (v) p/v Ratio (vi) margin of safety (vii) Target sales
(viii) Breakeven chart (ix) Effect of Tax (x) Marginal cost (xi) Terms.
Under thin technique all cost are to be classified into two groups: Fixed and variable. Level of activity planning. Effect of
change in sales price selection of optimum sales volume. Direct suffixation of products, Fixation of selling prices, Pricing
in depression. Accepting additional orders, exploring selecting of profitable product mix. Problems of limiting to clor.
Alternative methods of manufacture. Make on by working extra shift.

Profit:

The profit is the difference between the selling price and variable . Total expenses, Total expenses variable expenses and
fixed expenses. Profit is known as vet Margin. Net margin is arrived at often deducting fixed cost from total contribution.

Basic profit equation = Sales –V C- FC =Profit

S = VC + FC +Profit
Contribution P/C Ratio

Contribution is the difference between sales and variable expenses subtract the variable expenses from the sales price
you will get the contribution.

C = S-V=F+P

C =F+P

With the in erase or decrease of comfribution Profit with in crease or decrease directly.

Break Event Point:

The break even point is the sales volume where total sales revenues are equal to total expenses and thus there is no
profit or loss. That is at Break Even point. There will be no profit an no loss on At break even point total costs are equal
total sales. So that profit is equal to zero.

From this concept.

S= V+F (i) [profit = 0]

S-V= F+P

S- V=F

C= F

S= V+F

BE sales in unit = Total Fixed cost/Sales-Variable Cost( pen unit)= Total F/ CM per unit

BE Sales volume Tk = F×S/S-V= FxS/CM Ratio

Target profit

Target sale units = F+P/S-V

Volume= (F+P)S/S-V
CM Ratio:

Profit/Volume Ratio

The profit/volume Ratio popularly known as the P/V Ratio expresses the relation of Contribution to sales.

P/V Ratio = C/S×100 = Change in contributed

It is to be assumed that selling price, variable costs, the constituents of the ratio, will remain unchanged even for the
addition volume. But they changes, the p/v ratio will also change.

BEP = F/P/V ratio = F×S/S-V = F/S-V/S

Marginal Cost:

Economists defined marginal cost as the amount at any given volume of out put by which aggregate cost are changed if
the volume of out put is in creased or decreased by one unit suppose.

Semi Variable cost: Y =MX+C

Y = Total semi fixed cost , X = Production units /output

C = Fixed cost, M = Variable cost pen unit.

Break even chart.

A Break even chart is a graphical representation of marginal cost. It is an important aid a chart which shows the point at
which neither profit nor loss is mode.

Sales. 3000 units. (a) Tk 10 per unit. Variable cost Tk 6 per unit. Fixed cost Tk 6000.

Angle of incidence : This the angle between Sales angle total cost line. This angle is an indicator of profit corning capacity
over weak even point.

Margin of Safety:

This is vepreserted by excess sales over and above the Break Even Point. It may be said that margin of safety is also the
excess production over Break Even Point. Total sales –BE . Sales =M/S

M/S =P/P/V ratio = P/C/S

M/S is an indicator of the strength of business. That is a high margin with indicate the good position an healthy condition
of a business.
Ex. Sales 3000 units @ Tk. 100 per unit, variable costs Tk. 60 per unit and fixed (total)Tk.
60000.

1. Sale= Total Cost + Profit [TC=V+F]

S = Variable Cost + Fixed Cost + Profit or [S=V+F+P]
2. Profit:
i) P= S-V-F = 3000x100-3000x60-60000 = Tk. 60000
ii) P= CM-F = 3000x40-60000 = Tk. 60000
3. Contribution Margin (CM):
CM= S-V = 100-60 = Tk 40 per unit or 3000x100-3000x60 = Tk. 120000

Project A CM= Tk 500, Project B CM= Tk 450

4. CM Ratio = CM/S, 40/100 = 40% = 0.4
5. Variable Cost Ratio= V/S [V=S-CM] = 60/100= 60%
6. BE Point: Formula for Break Even Analysis
The formula for break- even analysis is as follows:
BE Sales= Total Cost= V+F
i) BEP in units = Total Fixed costs / CM per unit = 60000/40= 1500 units = 1500x100=Tk 150000
ii) BEP in units = Total Fixed costs / (Sales per unit- Variable Cost per unit) = 100-60=40

iii) BEP in Taka (Sales volume) = Total Fixed costs / CM Ratio = 60000/.4=Tk 150000
iv) BEP in Taka (Sales volume) = FxS/S-V= 60000x100/(100-40)= Tk 150000
At BEP, P = 0
P = CM-F = 1500 units x 40 – 60000 = Tk. 0
P = S-V-F = 1500x100 – 1500x60 – 60000 = Tk.0

7. Margin of Safety(M/S) = Total Sales- BE Sales = 3000-1500=1500

units ....................o.........1........2.......3
[GP= 1500units, BL=1000 units, AT= 500units]
BREAK EVEN:

In accounting, the break-even point formula is determined by dividing the total fixed costs associated with
production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to
those which do not change depending upon the number of units sold. Put differently, the breakeven point is the
production level at which total revenues for a product are equal total expenses.

In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit
minus the variable costs per unit of production.

The breakeven point is the level of production at which the costs of production equal the revenues for a product.

In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its
original cost.

Where:

● Fixed costs are costs that do not change with varying output (e.g., salary, rent, building machinery).
● Sales price per unit is the selling price (unit selling price) per unit.
● Variable cost per unit is the variable costs incurred to create a unit.

It is also helpful to note that sales price per unit minus variable cost per unit is the contribution margin per unit.
For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the
contribution margin per unit and contributes to offsetting the fixed costs.

Example of Break Even Analysis

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously
determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which
add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water
bottle is sold at a premium price of $12. To determine the break-even point of Company A’s premium water
bottle:

Break even quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to
sell 10,000 units of water bottles to break even.
Graphically Representing the Break Even Point
The graphical representation of unit sales and dollar sales needed to break even is referred to as the break even
chart or Cost Volume Profit (CVP) graph. Below is the CVP graph of the example above:
Prob. 1. The following data is obtained from the cost record of a company:

Sales 3000 units @ Tk. 100 per unit, variable costs Tk. 60 per unit and fixed Tk. 60000. Required

1. Calculate CM Ratio and Profit

2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company wants to earns a profit of Tk. 100000.
6. Calculate BEP if selling price is increased by 10%.
7. Calculate BEP if variable cost is increased by Tk. 10.
8. Show in a chart BEP, M/S and Angle of incidence.
9. Calculate sales price if BEP is to be achieved at 1000 units.
10. Calculate BEP if margin of safety is increased 60%.

Prob. 2. The following data is obtained from the cost record of a company:

Sales Tk. 300000, variable costs Tk. 180000 and fixed Tk. 60000. Require

1. Calculate CM Ratio and Profit

2. Calculate BE sales volume.
3. Calculate Margin of Safety
4. Calculate sales volume if the company earns amount of profit of Tk. 120000.
5. Calculate BEP if selling price is decreased by 10%.
6. Calculate BEP if variable cost is decreased by Tk. 10.

Prob. 3. A company sales 3000 units @ Tk. 100 per unit. Its fixed Tk. 60000 and CM ratio 40%. Require

1. Calculate CM Ratio and Profit [ CM=100x.4=40, V=S-V= 100-40=60]

2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 100000.
6. Calculate BEP if selling price is increased by 10%.

Prob. 4. The following data is obtained from the cost record of a company:

Sales 3000 units @ Tk. 100 per unit. Direct Materials Tk. 30 per unit. Direct labour Tk. 20 per unit.

Factory overhead Tk. 30 per unit ( of which 2/3 fixed). Require [ V= DM Tk30+DL Tk 20+FO10=Tk60/unit]

1. Calculate variable costs, fixed costs, CM Ratio and Profit [ F=3000x20=Tk60000]

2. Calculate BEP in units and BE sales volume.
3. Calculate amount of profit if sales are 3500 units.
4. Calculate sales volume if the company earns amount of profit of Tk. 120000.
5. Calculate BEP if selling price is increased by 10%.
Prob. 5. A company sales 3000 units @ Tk. 100 per unit. Its M/S 50% and CM ratio 40%. Require

[M/S= 3000x50%=1500 units, BEP=Total Sales- M/S=3000-1500=1500 units, BEP= F/CM per unit, F= BEP x CM per
unit=1500x40=Tk. 60000]

1. Calculate variable costs, fixed costs CM Ratio and Profit

2. Calculate BEP in units and BE sales volume.

Prob. 6. The following data is obtained from the cost record of a company:

BEP 1500 units, sales Tk. 100 per unit, CM ratio 40%.

1. Calculate CM Ratio and Profit, variable cost and fixed costs.

2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 120000.

Prob. 7. The following data is obtained from the cost record of a company:

Sales 3000 units @ Tk. 100 per unit, profit Tk. 60000 and CM ratio 40%. Require [F=S-V-P= 300000-180000-60000]

1. Calculate CM Ratio and Profit and fixed cost.

2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety’
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 120000.