Plant Capacity 2000000 units per year Last Year

Past year's level of op 1500000 units Actual

Unit fixed cost 1.98
Average unit selling price 7.2 Unit Variable cost 4.5
Avg selling price 7.2
Total fixed costs 2970000 units sold 1250000
Average unit variable cost 4.5 Total fixed cost 2970000
Total Variable cost 6750000

Total cost 9720000

Total SP 10800000

Total profit max 1080000

Actual proft 900000
profit per max 0.72

cost per 6.48

contribution 2.7
 John
Maximum Percentage 1100000 margin above BE 1800000
1.98 100.00% 2.7 37.5
4.5 100.00% 4.5
7.2 100.00% 7.2

3960000 75.00% 3690000

9000000 75.00%

12960000 75.00%

14400000 75.00% 7920000 Breakeven

1440000 75.00%

0.72 100.00%

6.48 100.00%

2.7
What are the assumpt ions implicit in BillFrench's determinat ion of his company's break-even point ?

Answer
2.Sales mix will remain constant
4.Sales prices will remain constant
1.Sales prices will remain constant
3.Level of fixed and variable costs has been
assumed to be unchanged 5%
degree of operating lev

operating profit = Contribution - Fixed cost ol*fl = total leverage

a automated mode of
operation will have
gross profit = sales - cogs(product cost) more fixed costs
if fixed cost =
operating profit = gross profit - (admin+selling+dist exp) contribution, profit is 0

% change in
contribution =% change
in profit if degree of
operating leverage is 1.
If DOL is high, small
change in sales, will
lead to large change in
net profit = operating profit - profit
operating leverage= contribution/op profit
financing leverage =
break-even point ?

1.55555555555556
0.0777777777777778

operating profit increases

by 77.78%

in such a case, the ability of the enterprise

On the basis of French's revised informat ion,
what does next year look l ike:
a. What is the break-even point ?

2(a). Assumption for next year

Product A reduces to 400,000 units
Product C increase to 950,000 units (500,000+200,000+250,000)
Fixed cost per year increase to $720,000($60,000 x 12
months and the difference charged to Product C only
Fixed cost for Product C = $450,000 + $720,000 = $1 ,170,000.
Selling pr ice for Product C increase to $4.80.

Formula
Var iable cost to sales : Total Var iable cost/ Sales revenue
Ut i l izat ion of capaci ty : Sales volume/ Sales at ful l capaci ty
Break-even point operat ion : Fixed Cost/ Cont r ibut ion/uni t

2(b). To pay extra dividend

Last year
Profit = $900,000 (divided evenly between government & company $450,000:$450,000)
Dividend paid = $300,000
This year

Dividend to be paid = $300,000 + 50% extra = 300,000 + 150,000 = $450,000

Profit retained = $150,000
Profit (after tax) needed by company = 450,000 + 150,000 = $600,000
Profit (before tax) targeted = $600,000 + $600,000 because the profit will be divided
evenly between gov. and co,

2(c). To meet the union demands

Increase 10% in variable cost

Total variable cost = $5,925,000 + 10% = $6,517,500
Variable cost per unit = $6,517,500/1,750,000 units = $3.72
Contribution per unit = Selling price - variable cost per unit = 6.95 - 3.72 = 3.23
Dividend maintains as $300,000
Profit to be retain is still $150,000

variable cost is dealt with per unit basis where as fixed cost on a aggregate basis

2(d). To meet the union demands and expectation dividend

Increase 10% in variable cost

Total variable cost = $5,925,000 + 10% = $6,517,500
Variable cost per unit = $6,517,500 / 1,750,000 units = $ 3.72
Contribution per unit = Selling price - variable cost per unit = 6.95 - 3.72 = 3.23
Dividend : $450,000
Profit to be retained is still $150,000

once I arrive at breakeven, I split that breakeven to individually arrive at the breakeven of A,
B,C or go for product mix
multi product case we use fixedcost/pv ratio(aggregate level)
single product we can use both methods
 Current Year
Particulars Aggregate Product
A B C
Sales at 100% 2000000
Sales volume 1500000 600000 400000 500000
Unit Sales Price 7.20 10.00 9.00 2.40
(500,000+200,000+250,000) Total sales revenue 10800000 6000000 3600000 1200000
Variable cost per 4.5 7.5 3.75 1.5
Total variable 6750000 4500000 1500000 750000
$1 ,170,000. Fixed costs 2970000 960000 1560000 450000
Profit 1080000 540000 540000 0

Ratios
Variable cost to sales 0.625 0.75 0.416667 0.625
Unit contribution to sales 0.375 0.25 0.583333 0.375
Utilization of cap 75.00% 30.00% 20.00% 25.00%
Sales revenue
Sales at ful l capaci ty Break even for the next year
Cont r ibut ion/uni t Particulars Aggregate Product
A B C
Sales at 100% 2000000
Sales volume 1750000 400000 400000 950000
Unit Sales Price 6.95 10 9 4.8
Total sales revenue 12160000 4000000 3600000 4560000
Variable cost per 3.385 7.5 3.75 1.5
Total variable 5925000 3000000 1500000 1425000
Fixed costs 3690000 960000 1560000 1170000
Total Costs 9615000 3960000 3060000 2595000
Profit 2545000 40000 540000 1965000
Contribution per unit 3.565 2.5 5.25 3.3
Breakeven Analysis 1035063.11 384000 297142.9 354545.5

Ratios
Variable cost to sales 0.48725329 0.75 0.416667 0.3125
Unit contribution to sales 0.51274671 0.25 0.583333 0.6875
Utilization of cap 0.875 0.2 0.2 0.475

Level of operation must be achieved

Dividend to be paid 450000
Profit to be retained 150000
Profit after tax 600000
Profit before tax 1200000
Fixed Cost 3690000
the proft before tax targeted 1200000
Total fixed cost 4890000
Contribution/Unit 3.56
BEP/level of operation must be achieved 1373596

The profit before tax must be 1200000 in order to meet the dividend of
450000 and retained profit of 150000, therefore it is considered as fixed cost

Dividend to be paid 300000

Profit to be retained 150000
Proft after tax 450000
Profit before tax (after taking into consider 900000
Unit sales price 6.95
variable cost/unit 3.72
Contribution/unit 3.23
Fixed cost 3690000
(+) the profit before tax targeted 900000
Total fixed cost 4590000
BEP/level of operation must be achieve 1421053

Level of operation must be achieved

Dividend to be paid 450000
Profit to be retained 150000
Profit after tax (needed) 600000
Profit before tax (after taking into consider 1200000
Unit Sales price 6.95
Variable cost/unit 3.72
Contribution/unit 3.23
Fixed cost 3690000
(+) the profit before tax targeted 1200000
Total fixed cost 4890000
BEP/level of operation must be achieve 1513932
Total Sales Cost Avg Cost
12160000 6.948571
Can the break-even analysis help the
company to decide whether to al ter the
exist ing product emphasis? What can the
company af ford to invest for addi t ional "C"
capaci ty?

Breakeven Analysis:
Help the company decide to al ter
the exist ing product because i t wi l l
al low the company to ident i fy which
product generates the highest prof i t .

Product C
Fixed Cost 1170000
Unit Sales Price 4.8
Sales Revenue 4560000
Variable Cost per unit 1.5
Total Variable cost (950000 * 1.6) 1425000
Contribution (4.8 - 1.5 = 3.3) $3.3 * 950000 unit 3135000
Total No. of Units produces 950000
Investment the company can afford 1965000
Calculate each of the three products breakeven
points using the data in Exhibi t 3. Why
is the sum of these three volumes not equal
to the 1 , 100,000 uni ts aggregate break-even
volume?

Product
Particulars A B C
Fixed Cost 960000 1560000 450000
Unit sales price 10 9 2.4
Variable cost per unit 7.5 3.75 1.5
Contribution unit 2.5 5.25 0.9
Break-even point 384000 297142.9 500000

Sum of the three products 1181143

Not equal to 1100000 because = Fixed cost

This is because, i f the product are calculated individual ly where

i t ignores the ef fect of the product mix there is a di f f rent in
total amount of BEP

This is where the product ion of each product is di f ferent in values

and uni ts that cont r ibute to the f ixed costs

In this product mix, the higher the cont r ibut ion margin in a
product wi l l help to cover the f ixed costs of the less ef f icient
product because they share the same f ixed costs.
Is this type of analysis of any value? For
what can i t be used?

It can be used
To help understand and formulate the relat ionship
between cost ( f ixed and var iable) , output , prof i t .
To determine the most prof i table product or service
To ident i fy what sales volumes that need to be achieved
and sales goals that need to meet by the market ing or
sales depar tment
To assist in establ ishing pr ices of products or services
To assist in analyzing how the mix of products af fects prof i t
To set sales target and/or pr ice to generate prof i ts.
To f ind out which product are per forming wel l and which
are leading to losses
Conclusion

Cost Volume Prof i t (CVP) Analysis and Break Even Analysis is

the cr i t ical factor in prof i t planning

As an impor tant par t for the company of shor t - term decision

making in a business