Managerial Account! ing CHAPTER # 24 Break Even and Cost-Volume-Profit Analysis Break Even Analvs Break even analysis is used to determine the level of sales which are required to just recover all costs incurred during the period. Break Even Point The point at which there ‘equal to total cost. ‘no profit no loss. In other words it is a point where total Tevenue 1. Contribution Mai CM = Sale price — Variable Cost 2. CM ratio cM Sale Price 3.Break Even Point in Units Fixed Cost CM per unit CM ratio = Q(BEP) = 4. Break Even Point in Sales Revenue Fixed Cost RG@EP) = CM ratio. 5. Sales Units to Achieve Target Profit Fixed Cost ¥ Target Profit GM per unit §. Sales Revenue To Achieve Target Profit Fixed Cost + Target Profit CM ratio 1.Marein of Safety Margin of Safety = Expected or Actual Sale ~ Break Even Point 8. Margin of Safety (M/S) ratio Margi MIS ratio= occted Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 1Managerial Accounting = "Total Capacity Ex#t Solution i) (CM ratio = CM / Sales (CM ratio = $2,700,000 / $4,500,000 = 0.6 CM = Sales ~ Variable Cost CM = $4,500,000 - $1,800,000 = $2,700,000 i) R(BEP) = “Hed cest R(BEP) = $1,200,000 / 0.6 = $2,000,000 iii) Contribution Margin = $2,700,000, Ex#2 0) R(BEP) = CM Ratio, R(BEP).=$84,832/ 0.44 = $192,800 Profit'= Sales — Variable cost ~ Fixed Cost ‘$31,768 = $265,000 - 148,400 - Fixed Cost Fixed Cost = $116,600 ~ 31,768 = $84,832 [CM ratio = $265,000 ~ 148,400 / 265,000 = 0.44 2 Sales Revenue to Achieve Target Profit of $10,560 _ Fixed Cost + Target Profit ~ CM ratio p= 304832 + $10,560 - 0.44 R R= $216,800 ee perrer pra -7sp seer pepsrenmpeneyeeeaeorseerer=rase> weer serene Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 2Manager’ 1 Accoun’ ng Ex #3 Solution Fixed Cost @ —-R(BEP) = R(BEP) $4290 / 0.33 = $13,000 CM ratio = CM / Sale Price = $0.825 / $2.5 = 0. CM = $2.5 -$1.675 = $0.825 Fixed Cost Q(BEP) = CM Per unit Q(BEP) = $4,290 / $0.825 = 5200 Units (ii) Sales Revenue to Achieve Target Profit of $10,560 Fixed Cost +Target Profit ‘CM ratio _ $4290 + $8,250 x 0.33 R= $38,000 Proof Profit= Sales — Variable cost ~ Fixed cost Profit= $13,000 ~ (5200 x $1.675) - $4,290 Profit = $43,000 - $8,710 - $4,290 = 0 LT Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 3Managerial Accounting Ex#4 R(BEP) = $252,396 / 0.38 = $ 664,200 CM ratio = $342,000 / $900,000 = 0.38 CM = $900,000 - $558,000 = $342,000 Ex#s R(BEP) = $4,000 / 0.5 = $8,000 CM ratio = $2.50 / $5 = 0.5 CM © $5 - $2.50 = $2.50 Ex #6 1 CM ratio = $2,000,000 / $10,000,000 = 0.2 CM = $10,000,000 - $8,000,000 = $2,000,000 2 R(BEP) = $1,000,000 / 0.2 = $5,000,000 3.(a) R(BEP) = $1,100,000 /0.2 = $5,500,000 (b) Profit * Sales Variable cost — Fixed cost Profit= $10,000,000 - $8,000,000 - $1,100,000 Profit = $900,000 4a) CM ratio = $2,500,000 / $10,000,000 = 0.25 CM = $10,000,000 - $7,500,000 = $2,500,000 (b) R(BEP) = $1,250,000 / 0.25 = $5,000.000 © Profit = Sates ~ Variable cost ~ Fixed cost Profit = $10,000,000 - $7,500,000 - $1,250,000 Profit = $1,250,000 LT Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 41 R(BEP) = $46,200 / 0.7 = $66,000 CM = $80,000 - $24,000 = $56,000 CM ratio = $56,000 / $80,000 = 0.7 v Q(BEP) = $46,200 / 1.4 = 33,000 units Total CM / Units Sold CM per unit CM Per unit = $$56,000 / 40,000 units = $1.4 3i R(BEP) = $48,067 / 0.7) = $67,700 CM = $80,000 - $23,200 = $56,800 CM ratio = $56,800 / $80,000 = 0.71 4. Sales Revenue to Achieve Target profit of $9800 = Plxed CostsTarget Profit cM rate R 0 1367439800 R= $84,300, CM aatio = $55,200 / $80,000 = 0.69 CM = $80,000 - $24,800 = $55,200 Increase in'Sal New Sales nceded for $9800 profit $84,300 Budgeting Sales 80,000 Increase in sales $4,300 5. Budgeting Profit Sales (34,000 Units $2.1) $71,400 Less: Variable cost Production (71,400 x 23.75%) $16,958 Marketing (71,400 = 6.25%) 4.463 2142 Contribution Margin 49,979 Less: Fixed Cost Production $20,000 Marketing 26,200 46,200 Profit $3,779 333-8786389 The Standard College — Page S Roohullah (M.Com) Lecture!Managerial Accounting Sale price = $80,000 / 40,000 units = $2 New Sale price $2 * 1.05 = $2.1 Variable percentage Production = $19,000 / $80,000 « 100 = 23.75% Marketing = $5,000 / $80,000 « 100 = 6.25% R(BEP) = $46,200 / 0.7 = $66,000 (CM ratio = $49,976 / $71,400 = 0.70, Ex#8 Solution () Direct Costing / Variable costing Sales (100,000 * $100) $10,000,000 Less: Variable cost (100,000 = $25) 2 Contribution Margin $7,500,000 Less: Fixed Cost (100,000 = $50) 5,000,000 Profit $2,500,000 Gi) rice Cost R(BEPY= ‘CM Ratio $5000.000 R(BEP) = Sse R(BEP) = $6,666,667 cM _ $7500.00 _ CM ratio = Se = Se 075 Margin of safety ratio = iy = $2323333 Margin of safety ratio = S222 Margin of safety ratio = 0.3333 or 33.33% 333-8786389 The Standard College Page Roohullah (M.Com) LectursManagerial Accounting Ex#9 Sales $200,000 Less: Variable cost 100,000 Contribution Margin 100,000 Less: Fixed Cost 40,000 Profit 360,000 CM ratio = $12080° = 0.5 Ex #10 cy Roce) = Haseena $160,000 = <2cest 026 Fixed Cost = $57,600 (2) Sale for the year px Pied contorargeeProfte M Ratio = $57.600452800 R= Te $240,000, @) (CM = Sale3— Variable expense $240,000 ¥ 36% = $240,000 — Variable expense Variable expense = $240,000 - $86,400 = $153,600 ® \ Margin of Safety ratio = Memes sales i $80,000 Margin of Safety = Froygp = 0.3333 of 33.33% Margin of Safety = Sale - BEP = $240,000 - $160,000 = $80,000 Leen eee ee ea =ESNEE TONE NETTI5T OnE Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page? aManagerial Accounting Ex# 11 Solution Plxed Cost, () REP) = Sa R(BEP) = 228° = s40,s00 (2) Actual Sales? Margin of Safety Margin of Safety ratio = ““#er* sates-0ar 0S ee = Sales=$40500 0.25 = Steesosve 0.25 Sales = Sales - $40,000 $40,500 = Sales - 0.25 Sales $40,500 = 0.75 Sales Sales = $40,000 / 0.75 Sales = $54,000 Q) Profit = CM.— Fixed. cost Profit = ($54,000. 30%) - $12,150 Profit = $16,200 - $12,150 Profit = $4,050 Ex #2 Solution ao Decrease in Sales Last month sales $220,000 Current month sales 206.250 Decrease in Sales $13,750 —— —. Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 8Manager! jal Accoun! g Old ratio New ratio Sales $220,000 100% 100% Variable cost 132,000 60 4 cM $88,000 40% 36% Current Month Sales = $422 x 109 = $206,250 Q Break Even Point? MIS ratio = ‘Sale $206.250-A(BEP) 3206250 0.24 = $49,500 = $206,250 - R(BEP) R(BEP) = $206,250 - $49,500 R(BEP) = $156,750 8 Profit = Sales ~ Variable cost ~ Fixed cost Profit = $206,250 - $132,000 - $56,430 Profit = S17,820 Etxed Cost ROBERS ‘eM ratio. Fixed cost $156,750 = Se Fixed cost = $56,430 Decrease in Fixed Cost Last month Fixed Cost $61,600 ‘Current Month Fixed Cost 56.430 Decrease in Fixed Cost $5,170 MIS ratio = S2S—8EP ‘sale = $220.000-n086P) os $220,000, $66,000 = $220,000 - R(BEP) R(BEP) = $220,000 - $66,000 To Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 9Managerial Accounting R(BEP) = $154,000 Fixed Cost RIBER) = CM ratio Fixed Cost $154,000 = Seed cost Fixed Cost = $61,600 Ex #13 Solution (yy @) QB) Q(Bep) = Accor (eer) = = $50 Q(BEP) = 50 Units CM = Sale Price ~ Variable cost (CM = $10,000 - $5,000 = $5,000 Totat CM. CM per unit = Zac. CM perunit = sce = $50 ‘Opcrating Income CM (5.000 units * 1.25) $6,250 Fixed cast 2.500 Operating Income $3,750 caer) = Man R(BEP) = 4200 R(BEP) = $8,400 $5,000 CM ratio = 33200 =05 Roohultah (M.Com) Lecturer: 0333-8786389 The Standard College Page 10Managerial Accounting Ex# 14 Solution (1) Profit = Sale ~ Variable cost ~ Fixed cost - Advertising (50,000 units * $6) * 10% = (50,000 * $6) - (50,000 3) - $100,000 ~ Advertising $30,000 = $300,000 — 150,000 — 100,000 — Advertising Advertising = $300,000 - 150,000 ~ 100,000 - 30,000 Advertising = $20,000 i Plxed Q) R(BEP) = = R(BEP) = $102000+20.000 Os R(BEP) = $240,000 om Sale price CM ratio = 2 CM ratio = = =O, CM = Sale price Variable Cost CM = $6- $3 = $3, Fixed Cost Q(BER) = carrer unit 3 QUBEP) = ry Q (BEP) = 40,000 Units Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 11.Managerial Accounting Ex# 15 Solution @) R(BEP) = Feet Cost R(BEP) = 72000 R (BEP) = $2,640,000 cu Sale price CM ratio $6 M ratio = = = 03 (CM = Sale price — Variable Cost CM = $20-S14=S6 _ Fixed cost Q(BEP) = CM Per unit s772.900 Q(BEP) = Q(BEP) = 132,000 Units Units to be sold to achieve target profit of $60,000 = Lied osterarset profi = (CM per unit = S7zserescnn00 = 6 Q'= 142,000 Units Units 10:be sold to achieve target profit of $90,000 after tax Fired Costs Target profit Q M per unit __ $79200048150.000 Q= $6 Q = 157,000 Units Profit before tax ‘$150,000 Income tax (40%) 60,000 Profit after tax (60%) 390,000 Income tax = 90,000 « 40/60 = $60,000 a Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 12Managerial Accounting 4) Break Even Point in Units if Wages and Salaries increase by 10% Labor = Variable cost « 50% = 10% = S14 x 50% * 10% = $0.7 Labor = Fixed « 20% * 10% = $792,000 « 20% * 10% = $15,840 Fixed Cost Q(BEP) = Q(BEP) = Q(BEP) = S22 Q(BEP) = 152,423 Units CM per unit = Sale price — Variable cost CM per $20-$14.7 = $5.3 Ex #16 Solution a Q) a GM ratio = Sale price $27250 CM ratlo = Sar 2222 CM = Sale price~ Variable Cost CM'# $1,227,375 — $954,625 = $272,750 Fixed Cost M ratio R(BEP) = R (BEP) = $1,260,126 $220,000 S10 Q(BEP) = Q(BEP) = 28,000 days ed Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 13Total cM CM per unit = Units So1d CM per unit = SEE = $10 8) MSS ratio= mae a= SE MS ratio= SSS = “ R(BEP) = “Eeacest R¢BEP) = 50000 R (BEP) = $1,575,158 Q(BEP) = Saeco coer) = st Q(BEP) = 35,000 days Ex #17 R(BEP) = Esse R(BEP) = Soo R(BEP) = $300,000 — $120,000 Q(BEP) = = Q(BEP) = 133,333 units ou Sate Price CM ratio= 509 CM ratio= PE = 04 CM per unit = Sale price ~ Variable cost = $2.25 -$1.35= $0.9 Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 14Managerial Accounting Break Even Point in Percentage of Capacity = Break Even Point y 199 = “Total Capacity 133333 . = Paton * 100 = 66.7% Q) Margin of Safety = Sale- BEP = $450,000 - $300,000 = $150,000 Margin of Safety Sale M/S ratio = $150,000 MIS ratio= FOS x 100 MIS ratio = 33.33% Fixed Cost cM ratio e R(BEP) = 120000 R(BEP) = 3120000 R (BEP) = $369,231 om CM ratio = A CM ratio = 4 0.325 CMper unlit” = Sale price ~ Variable cost =$2.-$1.35 = $0.65 (4), \. Sales to achieve target profit of $30,000 Fixed Cost+Target Profit cM ratte R= $120.000+830.000 R = St20000+$s0000 or R= $375,000 $120000+530000 R= 032s R= $461,538 Str rn arnpnlinnnrarUnnn nnn renenUnUUUEIEnID TT TEnEEEEEEEETEEEE UIE! Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 15Managerial Accounting Fixed Cost M ratio 6) R(BEP) = $100,000 R(BEP) R (BEP) = $250,000 Q(BEP) = aoe Q(BEP) = 111,111 units Break Even Point in Percentage of Capacity _ Break Even Total Capacity —uuu aa * 100 = 55.6% 6) Budget Profit (a) (b) Sales ‘$450,000 | $450,000 Less: Variable Cost 270,000 _| 303.750 Contribution Margin 780,000 Less: Fixed Cost Expected Profit Variable Cost Units Sold ¥ Variable cost per unit 200,000 units = $1.35 = $270,000 o 225,000 units x $1.35 = $303,750 otal Sate Sales Price Units Sold = $450,000 = 200,000 Units 225,000 Units (a)Units Sold = ()Units Sold = sisie —_— Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 16Managerial Accounting Ex #18 wo (a) (b) Q) fa) (b) () GB) Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Fixed Cost Cw Pere Q(BEP) = Q(BEP) = 280° — 750 Units Sales (900 * 100) Less: Variable Cost (900 « 60) CM Less: Fixed Cost Profit Q(BEP) = “250° = $88 Units $90,000 Reduction in variable cost = $60 * 0.25 = $15 Variable Cost = $60 - $15 = $45 CM Per Unit = $90 - $45 = $45 Sales (900 x 90) Less: Variable Cost (900 * 45) cM Less: Fixed Cost Profit Sales (1000 #90) Less: Variable Cost (1000 * 45) cM Less: Fixed Cost Profit Sales (950 * 90) Less: Variable Cost (950 * 60) [M Less: Fixed Cost Loss $81,000 40,500 $300 $90,000 45,000 45,000 $500 ‘$85,500 57,000 28,500 ($1,500) Page 17Requirement (1) Compusite Break Even Point in Dollars Fixed cost__ _ $1000900 _ $1 569.599 posite CM ratio - Compositec $72 _ Composite Sate Price S112 as Composite CM ratio ‘Composite CM = Composite Sales price - Composite Variable cost Composite CM = $112 - $40 = $72 ‘omy Jes Pi Method of payment | Average Dally Rate | Patient Mix Weighted Daily Rate Selepayment $120 20% S24 Private Insurance 120 25 30 Madicare 110) 30 33 Madcaid 100 TRANS 25 Composite Sale Price Stn Composite Variable cos! Method of payment | Average Daily Rate] Patient Mix Weighted Daily Rate Sel-payment 340 205% 38 Private Insurance 40 25 10 Madicare 30 30 12 Madeaid —__[ 40 25 10 Composite Varisble cost $40 in patient Mixed est Tomposite cm per unit Requirement (2) Compusite Break Even Point in Dollars rixea cont __ $1,000,000 _ * Composite CM ratio a7 $1,492,537 Composite CM $80. 0.67 Composite Sate Price Composite CM ratio = Composite CM = Composite Sales price - Composite Variable cost Hee ee en eae TeEETINNTT ITT HESS Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 18Managerial Accounting Composite CM = $120 - $40 = $80 ‘Composite Sales Price Method of payment | Average Daily Rate | Patient Mix Weighted Daily Rate ‘Selfpayment 3120 30% $60 Private Insurance 120 30, 60, ‘Composite Sale Price S120 Composite Variable cost Method of payment | Average Daily Rate | __ Patient Mix Weighted Daily Rate ‘Self-payment ‘$40 30% + $20 Private Insurance 40 30. 20 Composite Variable cost L $40 ‘oposite Break Even Point in patient days Flsed cost $1000.00 _ Tompesite cM perwnle sap = 12-500days. Ex#20 @) ® Current Operation Low Elasticity High Elasticity (FARO Yas (52,000 Units (80,000 Units) PecUnit| > Total | Per Unit | Total | PerUnit | Total Sales $10.00.) $500,000 $9” | s46s,000 | $9 | $720,000 ¥ Manufacturing $5.00 | 250,000 | $5.00 | $260,000 | $5.00 | $400,000 Nonmanufacturing ‘1.00 50,000 2 46,800 0 72,000 Total Var. Cost $6.00 | $300,000 | $5.90 | $305,000 | $5.90 | $472,000 Contribution Margin’ | $4.00 | $200,000 | $3.10 | $161,200 | $3.10 | $248,000 Increase in annual program fixed cost $5,000 Manufacturing 1,000 ‘Nonmanufacturing $6,000 Contribution to other fixed costs & Income before income tax $200,000 s1si200 | s242,000 | ‘The low elasticity sales level can be anticipated to result in a contribution margin reduction of $38,800 ($200,000 - $161,200) Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 19Managerial Accounting The high clasticity sales level can be anticipated to result in a contribution marging increase ‘of $42,000 ($242,000 -S200,000) Ex #21(1) ‘Abite_ | Belite_ | (@)_| Profit per doliar of sales (profit + Sales) $0.20 $0.15 (b) | Contribution margin per unit (Sale price — Variable cost) $7.00 $3.75 (©) _| C/M ratio (CM * Sale price) 0.47, 0.56 (a) | Contribution Margin per hour (CM per unit x Units per hour) $70.00 ~|__$93.75 (©) | Profit per hour (Profit per unit x Units per hour) $30.00. | $25.00 (2) Belite is more profitable because of its greater contribution margin per hour, PROBLEMS Pal = Fixed cost o QCBEP) = eat per unit _ $440.00 Q(BEP) = 76 Q(BEP) = 275,000 boxes Q Current CM Ratio = <4 Current CM Ratio = 3° =04 Sate price Variable cost CM Ratio= —— 0.4 uy Site wre 2.402 «15%)] ‘Sale Price ate price -$27 ‘Sate Price 04'= 0.4 Sale price = Sale price - $2.7 $2.7 = Sale price 0.4 Sale price $2.7 = 0.6 Sale price Sale price = es Sales price = $4.5, ST Roobullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 20 eeManagerial Accounting (3) Sale to achieve target profit $184,000 ($110,400 * 100/60) Fixed Cost + Target Profit CM Ratio p= 2480,000 + $184,000 ~ 0.325 R= $1,920,000 s327 % CM Ratio = = 0.325 PH? Solution (1) Projected income after tax for 194 Income Statement ~ Direct Costing, Sales Less: Variable cost Contribution Margin Less: Fixed Cost Operating income Less: Tax ($90,000 40%) Profit after ax Fixed Coat @) (eer) = seen $135.00 QUBEP) = Q(BEP) = 12,000 units CM per unit = Sale price ~ variable cost CM per unit = $25 - $13.75 = $11.25 aS Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College Page 21Manager | Account ng (3) Net Income 19B Sales $550,000 Les: ariable cost 302,500 Contribution Margin 247,500 Less: Fixed Cost 146,250 Operating income ~ 101,250 Tax ($90,000 * 40%) 407500 Profit after tax 300500 (4) (wep) = Piedcost CM ratio R(BEP) = SH82° = $325,000 Sal CM Fate rlabte cost ‘ales = $550.000~302500 _ CM ratio = ST 0.45 (5) Sale to achieve profit of $90,000 after advertising of $11,250 Fixed Costs Target Profit R cM Rat $146.250+890,000 R= SHeamemenne = $525,000 (6) Advertising expense Sales ~ Variable cost —Fixed cost ~ Advertising = profit $550,000 ~ 302;500 - 135,000 ~ Advertising = $100,000 $112:500.- Advertising = $100,000 $112,500 - $100,000 = Advertising ‘Advertising = $12,500 786389 The Standard College Page 22 Roohullah (M.Com) Lecturer: 033:Managerial Accounting Pas Solution Fixe o R(BEP) = CM ratio $200000 R(BEP) = Soe R (BEP) = $723,065 Composite CM ratio = wee Composite CM ratio = = = 0.2766 posite CM ratio= > = 0. Composite CM = Composite Sale price - Composite variable cost Composite CM = $141 - $102 = $39 ce site Sal A(siox4) S40 B (SR * 3) 24 cgix? 22 siat omposite Vi A(S6* 4) $24 B(SS * 3) 1S, C(S9* 7) rx $102: Break Even Point by Dollars Product Units Sale Price | BEP in Dollars A (5128 * 4) 20,512 $10 $205,120 B__| (51283) 15.384 8 123,072 | S128 * 7) 35.896 [1 394.856 Q(BEP) = 2800 = 5,128 packages Fixed cont @) (wer) = SEs LE Roohullah (M.com) Lecturer: 0333-8786389 The Standard College Page 23Managerial Accounting R(BEP) = SOO = $646,512 ig = omposit OM ratio = —ompositcM Composit CM ratio = ee _ 438 Composit CM = #3 = 0.3094 Composite CM = Composite Sale price - Composite Variable cost Composite CM = $139 - $96 = $43 Composite Sale Price A(SIO« 6) $60 B(S8 3) 24 C(SII «5) 5S $139 Composite Variable Cost A(S6 x6) $36 B(SS «3) 15 C(S9* 5) 45 $96 Q(BEP) = SES? ~ 4.651 packages Bi n Point Product Units Sale Price | BEP in Dollars A (4651 *6) 27.906 S10 ‘$279,060 B (4651-% 313.953 8 111.624 Cc (4651.x 5) 23.255 MW 255.805 eee wer arse ospsmenrareapunmmm esse sneered Roohullah (M.Com) Lecturer: 0333-8786389 The Standard College —_ Page 24