SMALL CASE STUDIES ON BREAK-EVEN ANAYSIS.

BY PROF.DEEPIKA MIRCHANDANI.

IMPORTANT FORMULAS FOR BREAK – EVEN ANALYSIS .

1. BEP(BREAK EVEN POINT) = FIXED COST / Contribution per unit

OR

FIXED COST / PRICE-VARIABLE COST

OR

Fixed cost/ pv ratio

2. Contribution per unit= Selling Price Per Unit – Variable cost per unit

3. Margin of Safety= Actual Sales – Breakeven Point

OR

Actual Sales – Breakeven / actual sales

4. P/V (PROFIT VOLUME RATIO)= Contribution per unit / Selling price

per unit.

OR

Change in Contribution/Change in sales *100

5. Break Even Sales= Fixed Cost / P/v Ratio.

6. Sales to be increased BEP=fc * Sales/ Sales – Variable cost

1. Break Even Analysis

Let’s assume that you’re working on a case interview and your client is a well
known t-shirt manufacturer. The client is considering producing sweaters as
well but wants to figure out if this is a potentially profitable idea. As you work
through the case, you are able to extract the following pieces of data:

 Fixed costs will be $100,000 per month

 Average variable costs per sweater will be $20
 Average price per sweater will be $70

Using the break even analysis formula, let’s figure out how many sweaters
you’ll need to sell each month to break even:

BEP=FIXED COST / PRICE-VARIABLE COST

Break even point = $100,000 / ($70 – $20) = 2,000 units

2. XYZ Corporation has calculated that it has fixed costs that consist of its
lease, depreciation of its assets, executive salaries, and property taxes.
Those fixed costs add up to $60,000. Their product is the widget. Their
variable costs associated with producing the widget are raw material,
factory labor, and sales commissions. Variable costs have been calculated
to be $0.80 per unit. The widget is priced at $2.00 each.

Given this information, we can calculate the breakeven point for XYZ
Corporation's product, the widget, using our formula above:

$60,000 ÷ ( $2.00 - $0.80) = 50,000 units

What this answer means is that XYZ Corporation has to produce and sell 50,000
widgets in order to cover their total expenses, fixed and variable. At this level of
sales, they will make no profit but will just break even.

3.Concept of contribution of Margin

Break-even analysis also deals with the contribution margin of a product. The
excess between the selling price and total variable costs is known as
contribution margin.

CONTRIBUTION PER UNIT= Selling Price Per Unit – Variable cost per
unit

For an example, if the price of a product is Rs.100, total variable costs are Rs.
60 per product and fixed cost is Rs. 25 per product, the contribution margin of
the product is Rs. 40 (Rs. 100 – Rs. 60).

This Rs. 40 represents the revenue collected to cover the fixed costs. In the
calculation of the contribution margin, fixed costs are not considered.

4.Margin of safety.

Bob produces boat propellers and is currently debating whether or not he

should invest in new equipment to make more boat parts. Bob’s current sales
are $100,000 and his breakeven point is $75,000. Thus, Bob would compute
his margin of safety like this.

As you can see, Bob achieves a $25,000 safety buffer. This means that his
sales could fall $25,000 and he will still have enough revenues to pay for all
his expenses and won’t incur a loss for the period.Margin of safety is calculated
by applying the following formula( In Percentage terms)

Margin of safety = [(Current or estimated sales volume – BEP sales

volume)/Current or estimated sales volume] × 100

5.The Profit Volume (P/V) Ratio is the measurement of the rate of change of profit due to
change in volume of sales. It is one of the important ratios for computing profitability as it
indicates contribution earned with respect of sales.
The PV ratio or P/V ratio is arrived by using following formula.
P/V ratio =contribution x100/sales (*Contribution means the difference between sale
price and variable cost).
Here contribution is multiplied by 100 to arrive the percentage.
For example, the sale price of a cup is Rs.80, its variable cost is Rs.60, then PV ratio is (80-
60)× 100/80=20×100÷80=25%.