A R B A Z H A B I B – A C M A, MANAGEMENT ACCOUNTING–MA

Breakeven Analysis OR Cost-Volume-Profit(CVP) Analysis

Theory
Cost-volume-profit (CVP) / Breakeven analysis are the study of interrelation ship
between cost, volume and profit at various level of activity.

The management of an organization usually wishes to know the profit likely to be made if the
aimed-for production and sales for the year are achieved. Management may also be interest to
know the following.
 The breakeven point which is the activity level at which there is neither profit nor loss.
 The amount by which actual sales can below anticipated sales, without a loss being
incurred.

Contribution Margin OR Contribution to sales

Contribution margin is a measure to how much contribution is earned. It can be calculated as
follows.
Contribution margin = Sales – Variable cost
Variable cost includes direct material, direct labour, variable overhead, variable selling
and variable administrative overhead.

Contribution Margin Ratio (CM %) OR Contribution to sales ratio (C/S %)

Contribution margin is a measure of how much contribution is earned from each Rs.1 of sales. It
can be calculated as follows.
Contribution margin ratio (CM%) = Contribution margin x 100
Sales
OR
Contribution margin ratio (CM%) = Sales – variable cost x 100
Sales

Breakeven Sales in Amount (Rs.)

At the breakeven point, sales revenue = total cost and there is no profit. At the breakeven point
total contribution = fixed cost.
Breakeven Sales in amount = Fixed Cost
CM%

Breakeven sales in units

Breakeven points in units mean show many units to be sold to require to neither profit nor loss.
Breakeven Sales in unit = Fixed cost
CM per unit
CM per unit = Sales per unit – Variable cost per unit

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A R B A Z H A B I B – A C M A, MANAGEMENT ACCOUNTING–MA

Sales are required to earned profit if amount of profit is given

How many sales are required to sales to earned profit.
Sales are required to earn profit (Rs.) = Fixed Cost + Profit
CM%
OR
Sales are required to earned profit in units = Fixed Cost + Profit
CM per unit

Sales are required to earned profit if % of profit on sales is given

How many sales are required to sell to earned profit if % of profit on sales is given.
Sales are required to earned profit (Rs.) = Fixed Cost
CM% - TP%

Sales are required to earned profit after tax if amount of profit is given
How many sales are required to sales to earned profit after tax if amount of profit is given.
Sales are required to earned profit after tax (Rs.) = Fixed Cost + Target profit
1-tax rate
CM%

Sales are required to earned profit after tax if % of profit on sales is given
How many sales are required to sales to earned profit after tax if amount of profit is given
Sales are required to earned profit after tax (Rs.) = Fixed cost
CM% - Target profit %
1 – tax rate

Margin of safety (MOS)

The margin of safety is the difference in units between the budgeted sales volume and the
breakeven sales volume. It is some time as percentage of budgeted sales volume. The margin of
safety may also be express as the difference between the budgeted sales revenue and
breakeven sales revenue express as a percentage of the budgeted sales revenue.
Margin of safety = Budgeted sales revenue – Breakeven sales revenue
OR
Margin of safety ratio (%) = Budgeted sales revenue – Breakeven sales revenue x 100
Budgeted sales revenue

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