Break Even Analysis and Managerial

Decision Making

Barnali Chaklader

05/09/2020
The Profit Equation

Profit = SP(x) –VC(x) – TFC

X = Quantity of units produced and sold

SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost

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Operating income for lawn mower

Sales (1,000 units @ $400) $ 400,000

Less: Variable expenses (1000 units @$325) 325,000

Contribution margin $ 75,000

Less: Fixed expenses 45,000
Operating income $ 30,000

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Break-Even Point
Break Even Point

Break-even:
0 = Sales revenue – Variable expenses –
Fixed expenses
0 = ($400 x Units) – ($325 x Units) - $45,000
($75 x Units) = $45,000
Units = 600

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Check-up on break-even
Sales (600 units @ $400) $ 240,000

Less: Variable expenses( 600 x 325) 195,000

Contribution margin $ 45,000

Less: Fixed expenses 45,000

Operating income $ 0

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Assumptions of CVP Analysis

• Expenses can be classified as either

variable or fixed.

• CVP relationships are linear over a wide

range of production and sales.

• Sales prices, unit variable cost, and total

fixed expenses will not vary within the
relevant range.

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BREAK EVEN POINT (FORMULA)
 BEP (units) = Fixed Cost
Contribution/ unit

Where contribution/unit= Selling Price/unit-

Variable Cost/unit

Breakeven sales revenue =

Fixed costs / Contribution margin ratio
Contribution margin ratio = (Contribution/
Sales) *100

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BEP
Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
Break Even sales= Fixed Cost/ Contribution Margin
ratio
CM ratio= ($400-$325)/$400*100 = 18.75%
BES= $45000/ 18.75%= $ 240000

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If We want Target Profits
 Target profit in units:
 # Units = (Fixed cost + Target profit)/
 Unit contribution margin
 # Units = ($45,000 + $60,000) / ($400 - $325)
 # Units = 1,400

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MARGIN OF SAFETY: Definition
 Is the difference between break-even volume or sales
and expected volume or sales

Example
If actual units= 15000 units and BEP= 14000 units
MOS = 1000 units

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THANK YOU

05/09/2020