Break Even Analysis

Marginal Cost Sheet

Particulars Rs.
Sales 10
Less Variable Cost 6
Contribution 4
Less Fixed Cost
Profit

You operate a lemonade stand that

sells a cup of lemonade for ₹ 4.
The cost to produce a cup of
lemonade is ₹ 1. To legally
operate a lemonade stand, you had
1 to purchase a permit for ₹ 600.
How many cups of lemonade do
you need to sell to break even?

Contri Margin p.u = Selling Price - Variable Cost p.u

3

Contribution Margin Ratio = Contribution * 100

Selling Price
3
4
75

BEP in units = Fixed Cost =

Contri Margin p.u
600
3
BEP = 200
BEP = 200 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
600
75
 BEP = 800
BEP = ₹ 800

BEP in ₹ = BEP in units * Selling Price

200 * 4
800
BEP = ₹ 800

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
2 able to extract the following
pieces of data. Fixed costs will be
$100,000 per month, Average
variable costs per sweater will be
$20 and Average price per
sweater will be $70

Selling Price - Variable Cost p.u

50

Contribution Margin Ratio = Contribution * 100

Selling Price
50
70
71.42857143

BEP in units = Fixed Cost =

Contri Margin p.u
100000
50
BEP = 2000
BEP = 2000 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
100000
71.42857143
BEP = 140000
BEP = ₹ 140,000

BEP in ₹ = BEP in units * Selling Price

 2000 * 70
140000
BEP = ₹ 140,000

Your company produces and sells

widgets. Each widget costs ₹500
to produce. You have ₹100,0000
in fixed costs and expect to be
3 able to sell 1,000 widgets. What
minimum price do you need to set
for your widgets to break even?

BEP in Rs = FC * 100 =
Contri Margin p.u
1000 1000000
Contri Margin p.u
Contri Margin p.u = 1000

Contri Margin p.u = Selling Price - Variable Cost p.u

1000 Selling Price - 500
Selling Price = 1500

A pharmaceutical company is
considering investing money to
research a new drug. They believe
they can sell 10,000 units of this
drug for ₹ 201 each over the
course of the drug’s lifetime. The
4 cost to produce each drug is ₹ 1.
How much does the company
need to keep research costs under
in order to generate a profit?

Contri Margin p.u = Selling Price - Variable Cost p.u

200

BEP in units = FC
Contri Margin p.u
10000 FC
200
 FC = 2000000

Hamet cooperation makes iron

benches and wants to determine
the break-even point. The total
fixed cost for his business is
$60,000, and the variable cost is
5 $40 per bench. He sells the bench
for $100 per unit. If the variable
costs increase by $4, what will be
the change in the break-even
point?

Contri Margin p.u = Selling Price - Variable Cost p.u

100-40
60

Contribution Margin Ratio = Contribution * 100

Selling Price
60
100
60

BEP in units = Fixed Cost =

Contri Margin p.u
60000
60
BEP = 1000
BEP = 1000 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
60000
60
BEP = 100000
BEP = ₹ 100,000

BEP in ₹ = BEP in units * Selling Price

1000 * 100
100000
BEP = ₹ 100,000

Contri Margin p.u = Selling Price - Variable Cost p.u

100-44
 56

Contribution Margin Ratio = Contribution * 100

Selling Price
56
100
56

BEP in units = Fixed Cost =

Contri Margin p.u
60000
56
BEP = 1071
BEP = 1071 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
60000
56
BEP = 107143
BEP = ₹ 107,143

BEP in ₹ = BEP in units * Selling Price

1071 * 100
107100
BEP = ₹ 107,100
 Contri Margin p.u = Selling Price - Variable Cost p.u

Contribution Margin Ratio = Contribution * 100 The client is considering producing

Selling Price •Fixed costs will be ₹100,000 per m
•Average variable costs per sweater
BEP in units= Fixed Cost = Average price per sweater will be ₹
Contri Margin p.u

BEP in Rs = Fixed Cost * 100 =

Contribution Margin Ratio
nt is considering producing sweaters as well but wants to figure out if this is a potentially profitable idea. As you work thr
osts will be ₹100,000 per month
e variable costs per sweater will be ₹20
price per sweater will be ₹70
able idea. As you work through the case, you are able to extract the following pieces of data:
 Units p.u Fixed Cost Units p.u Variable Cost
1000 30 30000 1000 20 20000 Less:
1100 27.27 30000 1100 20 22000
900 33.33 30000 900 20 18000 Less:
1500 20 30000 1500 20 30000
750 40 30000 750 20 15000

In case of FC, the total amount remains same In case of VC, the p.u remains same
 Sales
Variable Cost p.u remain same Less:
Contribution
Fixed Cost total amount remains same Less:
Profit

Contri Margin p.u =

Contribution Margin R

BEP in units =

BEP in units =

First Method BEP in ₹ =

BEP in ₹ =

Second Method BEP in ₹ =

 Units Sold 1000
Amount p.u
Sales 10000 10
Variable Cost 4000 4
Contribution 6000 6
Fixed Cost 2000
Profit 4000

Selling Price - Variable Cost p.u

6

Contribution * 100
Selling Price
6
10
60

Fixed Cost =
Contri Margin p.u
2000
6
333
333 units

Fixed Cost * 100 =

Contribution Margin Ratio
2000
60
3333
₹ 3,333

BEP in units * Selling Price

333*10
3330
1 Particulars Amount
Variable Costs $400
Selling Price per unit $600
Desired Profit $400,000
Fixed Costs $1,000,000

Contri Margin p.u = Selling Price - Variable Cost p.u

200

Contribution MargiContribution * 100

Selling Price
200
600
33.33

BEP in units = Fixed Cost =

Contri Margin p.u
1000000
200
BEP = 5000
BEP = 5000 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
1000000
33.3333333333333
BEP = 3000000
BEP = ₹ 3,000,000

BEP in ₹ = BEP in units * Selling Price

5000 * 600
3000000
BEP = ₹ 3,000,000

2 Below is the income statement provided by a firm for a month.

Particulars Amount
Sales- 3000 units at $ $240,000
Less: -
Cost of Goods Sold
Variable Costs $180,000
Fixed Production Cost$19,800
Gross Margin $40,200
Less: -
 Selling and Administrative Expenses
Variable Costs $21,000
Fixed Costs $7,500
Net Income Before Ta$11,700

Variable Cost = 201,000

Variable Cost p.u = 201,000
3000
67

Fixed Cost = 19800+7500

27300

Contri Margin p.u = Selling Price - Variable Cost p.u

80-67
13

ontribution Margin Ratio = Contribution * 100

Selling Price
13
80
16.25

BEP in units = Fixed Cost =

Contri Margin p.u
27300
13
BEP = 2100
BEP = 2100 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
27300
16.25
BEP = 168000
BEP = ₹ 168,000

BEP in ₹ = BEP in units * Selling Price

2100 * 80
168000
BEP = ₹ 168,000

3 Units 100
Sales $5,700
 Variable costs $3,021
Fixed costs $153,900
Target Income $100,000

Sales p.u = 5,700

100
57

4 ariable Cost p.u = 3,021

100
30.21

Contri Margin p.u = Selling Price - Variable Cost p.u

57-30.21
26.79

ontribution Margin Ratio = Contribution * 100

Selling Price
26.79
57
47.00

BEP in units = Fixed Cost =

Contri Margin p.u
153900
26.79
BEP = 5745
BEP = 5745 units

BEP in ₹ = Fixed Cost * 100 =

Contribution Margin Ratio
153900
47
BEP = 327447
BEP = ₹ 327,447

BEP in ₹ = BEP in units * Selling Price

5745 * 57
327465
BEP = ₹ 327,465

4 Let us now look at an example where we will calculate the break-even point for multiple products.

Product Price $ Proportion to Revenue

Coffe 3 0.5
Latte 3.5 0.3
Choclate 4 0.2

Product Variable Cost $ Proportion to Revenue

Coffe 0.5 0.5
Latte 0.6 0.3
Choclate 0.7 0.2

Contribution

Contribution MargiContribution * 100 2.78

Selling Price 3.35

Fixed Cost

BEP in units = Fixed Cost = 55000

Contri Margin p.u 2.78

BEP in ₹ = Fixed Cost * 100 = 55000

Contribution Margin Ratio 82.9850746268657
oint for multiple products.

Weighted Average
 1.5
1.05
0.8
3.35

Weighted Average
0.25
0.18
0.14
0.57

2.78

82.9850746268657

55000

19784

66277
Budgeting

1 Production Budget

Particulars A B C
Budgeted Sales 20,000 30000 40,000
Add: Closing Stock 3,600 7,200 10,800
Less: Opening Stock 3,000 6,000 9,000
Units to be produced 20,600 31,200 41,800

2 Direct material Usage Budget

M1 M2 M3 M4
Particulars
(Kg) (Kg) (Kg) (Kg)
Raw Material usage for Production 395,600 229,000 333,200 280,200
Add: Closing Stock 45,000 18,000 9,000 18,000
Less: Opening Stock 50,000 20,000 10,000 20,000
Purchase quantity 390,600 227,000 332,200 278,200
Cost per Kg 5 4 3 2
Total Purchase Cost ### 908,000 996,600 556,400

3 Flexible Budget
6400 4800
6400 units 4800 units
Particulars
P.U Total P.U Total
Variable Cost
Direct Material 7.70 49,280 7.70 36,960
Direct Labour 16.00 102,400 16 76,800
Power 0.23 1,440 0.23 1,080
Repairs 0.27 1,700 0.27 1,275
Miscellaneous 0.08 540 0.08 405
A 24.275 155,360 24.275 116,520

Fixed Cost
Fixed Expenses 3.23 20,688 4.31 20,688
Administation, Selling and Distribut 0.56 3,600 0.75 3,600
B 3.80 24,288 5.06 24,288

Total Cost (A+B) 28.07 179648 29.33 140808

Profit 11.93 76,352 10.67 51192
Sales 40 256,000 40 192,000
4 Flexible Budget
75,000 85,000
75% 85%
Particulars
P.U Total P.U Total Units
Variable Cost:
Material Cost 40 3,000,000 36 3,060,000
Wages 10 750,000 10 850,000
Production Overhead 14 1,050,000 14 1,190,000
Selling and Administration Overhead 4.4 330,000 4.4 374,000
A 68.40 5,130,000 64.40 5,474,000

Fixed Cost:
Production Overhead 18.67 1,400,000 16.47 1,400,000
Selling and Administration Overhead 6.67 500000 5.88 500000
B 25.33 1,900,000 22.35 1,900,000

Total Cost (A+B) 93.73 7,030,000 86.75 7,374,000

Profit 2.27 170,000 4.45 378,000
Sales 96 7,200,000 91.2 7752000
Opening Stock
Units+Sold
Units to be produced - Closing Stock

Opening Stock
Units Used
+ Units
= to be purchased - Closing Stock

Closing StockOpening Stock - 10 % of Opening Stock

3200
3200 units
P.U Total

7.70 24,640
16 51,200
0.23 720
0.27 850
0.08 270
24.275 77,680

6.47 20,688
1.13 3,600
7.59 24,288

31.87 101968
8.14 26032
40 128,000
 100,000
100%
P.U Total Units

34 3400000
10 1000000
14 1,400,000
4.4 440,000
62.40 6,240,000

14.00 1,400,000
5.00 500000
19.00 1,900,000

81.40 8,140,000
5 500,000
86.4 8640000
NPV and IRR

1 Apple decides to compare the following two projects. The cost of Capital 8.09%. Which project should Apple o
Company A Company B
Year Cash Flows (In USD) Cash Flows (In USD) 8.00%
0 -100 -100
1 10 0
2 20 10
3 40 30
4 50 40
5 80 60

NPV ₹ 149.36 ₹ 102.62

NPV ₹ 49.36 ₹ 2.62

IRR 21% 9%

2 Netflix has COC of 6.51% Will purchase of new movie be profitable?

Year Cash Flow (In USD )
0 -5000000
1 1200000.00
2 2400000.00
3 3000000.00
4 3100000.00

IRR 28% Yes

Which project should Apple opt?