MANAGEMENT ACCOUNTING

Contributing margin, Break-even point

CAKELESIOUS COMPANY

Cakelesious company was found in 2020 in India. The aim of the company is to provide
delicious cookie cakes to target market, it has wide range of product varieties, chocolate flavored
cookie cake was one of its highest liked in the market and sold over many cities, it also adopted
sustainable business practices by sourcing its raw materials from non-deforested areas, and also
transferring some part of the profits to women education in rural areas.
After successfully launching business it has seen upward growth in its target market.

The product variety which the group has chosen in ‘Choco cookie cake’ which was sold for 40/-
at the current market, the total units produces in the span of 3 months were 10k cakes/units.
The company wanted to know what the contributing amount for the fixed costs, (the remaining
amount after deducting variable costs from total revenue), and also the break-even units. Hence
decided to calculate contributing margin as well as break even units, for this purpose the
management account wanted to study more in detail about contributing margin and break-even
point, upon his study he found that :-

Contributing margin
It represents the additional money generated for each product/unit sold after deducting the
variable portion of the firm's costs, it is basically computed as the selling price per unit minus
variable cost per unit, it shows the portion of sales that helps to cover the company's fixed costs,
anything which is left after revenue covering fixed costs is determined as profit, and the point at
which there is no profit or no loss is known as break-even point

Contribution Margin = Sales Revenue − Variable Costs
Contributing factor and Break-even point

Break-even point
Break-even point has roots in contributing margin, for a firm to determine its break-even point it
must first calculate contributing margin, upon diving the total fixed costs by contributing margin
i.e. sales revenue per unit minus variable cost per unit, firm arrives at break-even units, upon
selling those units at market price, there comes a situation of no profit and no loss known as
break-even point.

Break-even point = Fixed costs / (Sales revenue per unit – Variable cost per unit)

After getting an complete idea about the required components to calculate and find out the BEP
of Cakelesious company, management accountants decided to divide fixed costs and variable
costs and also calculate per variable cost pf 10k cakes / unit, to find out sales revenue the sale
price is Taken as 40 per unit as prevailing in market.

The calculations are shown below :

Particulars / Costs Amount Amount Per unit (10000 units)

(Rs.) (Rs.)
Fixed costs      
Land   100000  
Machinery   50000  
Factory Insurance   15000  
Depreciation*   2500  
Making an Website   2500  
Total Fixed costs   170000  
       
Variable costs      
Raw materials :      
Milk solids 1500    
Sugar 2000    
Cocoa butter 2500    
Almonds 3500    
Honey 2500 12000 1.20
Wages*   30000  
Electricity*   15000 1.50
Contributing factor and Break-even point

Packaging material*   25000 2.50

Refrigerating charges   21500 2.15
Expenses on machine   10000 1.00
Power and consumable stores   12000 1.20
Delivery van maintenance   10000 1.00
xxx   2500 0.25
Commission for retailers   2000 0.20
Total Variable costs   140000 14.00
Total costs   310000  
Sales (selling price 40 /unit)   400000 40.00
Profit   90000  

*Wages for Factory Workers: 40 @ ₹750/month = 30000

*Since Most of the power generated in the factory is solar based, Electricity charges are
only the fixed subsidised rates that the factory is supposed to pay. Total Factory Power
Charges: ₹15000

*Material X for within country - 10000

Material y for exports – 15000

*Depreciation: Value of Machinery and Equipment ₹50000

Depreciation on Fixed Method @ 5%/month.
Therefore, Depreciation for June 2020= 50000*5%= 2500

As mentioned earlier, Contributing factor represents the additional money generated for each
product/unit sold after deducting the variable portion of the firm's costs and Break-even point is
the level of operation which result in no profit or loss, it is the equalizer which is rightly in
between the total cost and selling price, for this company the contributing factor and the units at
break-even point are calculated as follows

Contribution Margin = Sales Revenue − Variable Costs

= [4,00,000 – 1,70,000]
= 2,60,000
= [2,60,000 / 10,000]
= 26 /unit
Contributing factor and Break-even point

Break-even point = Fixed costs / (Sales revenue per unit – Variable cost per unit)

= 170000 / (40 – 14)

= 170000 / 26
= 6538.46

Therefore, units 6539 (rounded off figure) is the required units for the firm to reach a break- even
level where the total revenue and the total cost are the same, leading to no loss or no profit.

To find the sales amount at break-even point :

PV Ratio: Profit volume ratio determines the relationship between the contribution and the sales.

PV ratio= Contribution/ selling price per unit

PV ratio= 26/ 40 = 0.65
In percentages, PV ratio= [26/ 40 ]* 100= 65%,

Break-even point (in rupees) = total fixed cost/ PV ratio

= 170000/ 0.65= 2,61,538.46

Therefore, the units at break even when sold at prevailing market price of the cookie cake, the
firm achieves 2,61,538.46/- as sales revenue, also known as break even revenue [No profit / No
loss].