BEP Analysis is used to do the following:

1 Determine the BEP

2 Calculating sales for a target profit
3 Determine the margin of safety

1 Determine BEP
A) In units= Total FC Where Contribn/unit= SP/unit-VC/un
Contribution per unit

B) In value= Total FC C/S Ratio= Contribution to sa

C/S Ratio

2 Calculate SALES for a target profit C/S Ratio + VC/S RATIO = 1

A) In units= Total FC + Target Profit C/S Ratio= 1 - VC/S Ratio
Contribn/unit

B) In value= Total FC + Target Profit

C/S Ratio

3 Margin of safety(MOS)
How safe a company is in terms of sales = By how much can the current sales be reduced to BEP, below which you m

Generally, MOS = Current sales - BEP Sales

MOS as % = Current sales - BEP Sales * 100

BEP Sales
Contribn/unit= SP/unit-VC/unit or Total Contribution
Number of units

C/S Ratio= Contribution to sales ratio= Contribution

Sales

C/S Ratio + VC/S RATIO = 1

C/S Ratio= 1 - VC/S Ratio

ced to BEP, below which you make a loss.

A company intends to start selling pliers. The chief accounatant has provided the following data:
Sh. SOLUTION
Fixed Costs a) BEP in units and valu
Metal Molding machine 1,000,000.00
Plastic grip molder 250,000.00
Sander 50,000.00
1,300,000.00
Variable cost(per unit)
Packaging material 400.00
Raw materilas 700.00
Grip metal 200.00
Shipping 75.00
1,375.00
Additional Information:
1 The marketing department estimates that they could sell a plier for Sh. 1,500 and that
the projects' sales will average 16,000 units per month.
2 The company wishes to break even and start to earn a profit within the first month.
The target profit level at the end of the first month is Sh. 250,000

REQUIRED:
a) Calculate the number of units and Sales Value required to break even.
b) Based on projected monthly sales, calculate the MOS. Comment on your answer.
c) The number of units required to earn the target profit at the end of the first month.
b) MOS
Projected
OPERATING STM/INCOME STM FOR THE TARGET PROFIT BEP
Sh. MOS
Sales 18,600,000.00
Total VC (17,050,000.00) MOS = Current/ Project
Conribution 1,550,000.00
Total FC Ksh. (1,300,000.00) If the company achieve
TARGET PROFIT 250,000.00

c) Sales units for a targe

Target profit

Total FC+ Target profit

Contribn per unit

Therefore, sales units

SOLUTION
a) BEP in units and value
BEP in units Total FC
Contribn/unit

SP per unit 1,500.00

VC per unit 1,375.00
Contribn/unit 125.00

BEP in units 10,400.00

BEP in value Total FC

C/S Ratio

C/S Ratio 0.083333333333

BEP in value 15,600,000.00

Units
16,000.00
10,400.00
5,600.00

MOS = Current/ Projected sales - BEP

If the company achieves the projected sales, it will be safe by 5,600 units. Meaning, the units can be reduced by 5600 before the compan

c) Sales units for a target profit

Target profit 250,000

Total FC+ Target profit

Contribn per unit

Therefore, sales units 12,400.00

uced by 5600 before the company makes a loss.
Tarvol Ltd manufactures and sells a single product. The company's contribution format income statement for the
year ebded 31 October 2022 is given below:
Total Per Unit %age to Sales
Sh. Sh.
Sales(20,000 units) 1,200,000 60 100%
Variable Expenses -900,000 45 ?
Contribution margin 300,000 15 ?
Fixed Expenses -240,000
Net Income 60,000

The company's management is anxious to increase profits and has asked for your analysis of a number of items.

REQUIRED:
a) Compute the contribution margin ratio and variable expense ratio
b) Compute the company's break-even point both in units and in shillings.
c) Compute the increase in net operating income of the company assuming that sales will increase by
Sh. 400,000 in the next financial year and the above cost patterns will remain unchanged. Use
contribution margin ratio in (a) above to compute your answer.
d) Refer to the original data. Assume that in the next financial year, the management targets the
company to earn a profit of Sh. 90,000. Compute how many units would have to be sold to meet
this target profit.
e) Calculate the MOS as a percentage.

SOLUTION
a) CM( C/S) Ratio Contribn 0.25
Sales

VC/VE Ratio 0.75

b) BEP
In units 16,000.00

In value 960,000.00

c) Increase in profits assuming sales are increased by Sh. 400, 000

Sales increase 400,000

Profit increase 100,000.00

d) Sales units for a target profit

Target profit 90,000.00

Sales units 22,000.00

e) MOS as percentage
MOS 240,000.00

MOS Percentage MOS *100 25%

BEP
n format income statement for the

ur analysis of a number of items.

ming that sales will increase by

ill remain unchanged. Use

e management targets the

ould have to be sold to meet

C/S Ratio + VC Ratio = 1

VC ratio = 1 - C/S ratio

Consider the following data for two products manufactured by NTC Limited
SOLUTION:
PROCUCT a) BEP in units and in shillings
Meko 13C
Units 43,800 71,175 Total Contribution
Sh. Sh. Contribution per unit
Sales 49,056.00 142,350.00 C/S ratio
Fixed Costs - 9,811.20 - 79,716.00
Variable costs - 29,433.60 - 42,705.00 BEP in units
Operating profits 9,811.20 19,929.00
BEP in value
REQUIRED:
a) Determine the break-even point of Meko and 13C in both units and shillings
b) Given that customers refill Meko three times for every two times they refill b) Composite C/S Ratio= W1CM
13C, compute the composite contribution margin.
c) Determine the BEP in shillings assuming that Meko and 13C are normally
purchased in the ratio one to one.

MIX ratio
Composite C/S ratio=

c) BEP in value

Total FC

Composite C/S ratio

Composite C/S ratio

Therefore, BEP in value

BEP in units and in shillings
Meko 13C
Total Contribution 19,622.40 99,645.00
Contribution per unit 0.448 1.4
0.4 0.7

BEP in units 21,900.00 56,940.00

BEP in value 24,528.00 113,880.00

Composite C/S Ratio= W1CM1+W2CM2………WnCMn

Product Mix Weight
Meko 3 0.6
13C 2 0.4
5 1

Composite C/S ratio= 0.52

BEP in value Total FC

Composite C/S Ratio

89,527.20

Composite C/S ratio

Product Mix Weight
Meko 1 0.5
13C 1 0.5
2

Composite C/S ratio 0.55

Therefore, BEP in value 162,776.73

Meko 81,388.36
13C 81,388.36
Penda Limited produces product 'Zed' . The company has a production capacity of
1,000 units of Zed a day.
The following relates to one unit of the product:
Sh.
Materials 120
Labour 40
Variable overheads 40
Fixed Overheads 100
Selling price 400
REQUIRED:
i) Calculate the BEP sales at the current selling price for 1,000 units.
ii) The marketing manager intends to reduce the selling price by either 10% or 20%
for the 1,000 units without affecting the total profit.
Advise the manager on the required sales volumes under the two options to maintain current
Profit=Target profit
BREAK EVEN POINT(BEP)

Point/Level of sales at which TR=TC

Therefore at BEP, profit/loss= Zero(0)

Below BEP, you make a loss

Above BEP, you a profit

FORMULAE

1 BEP in units= Total FC Contribn= Revenue - VC Only

Contribution per unit

2 BEP in value= Total FC C/S=Contribn to Sales= Contribution

C/S Ratio Sales
C/S ratio + VC ratio = 1

VC ratio = VC
Sales
3 Sales units for a target profit= Total FC + Target profit
Contribution per unit

4 Sales value for target profit= Total FC + Target profit

C/S Ratio

5 Margin of safety ( MOS)

How safe a company is in terms of current or projected sales……………..Measures by how the current ofr projected s

MOS is the excess of current/projected sales over BEP

MOS= Current / projected sales - bep sales

MOS as percentage= MOS *100

BEP
 Contribution

he current ofr projected sales can be reduced to BEP, below which we make a loss.