Cost Volume Profit Analysis

Break Even Analysis

Prof. Keyur Thaker

What IF?
My sales revenue is 1 lacs
Variable cost per unit increases by 10%
Selling Price is reduced by 15%
Sales volume increases by 5%
Raw Material is cheaper by 15%
Spice Jet sells its 20 unsold seat to Mumbai at Rs.
1000.
Gujarat Gas has to give only 5 connection in Spring
Valley at Dumas _Surat ?

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 Assumptions
1. Changes in Level of Revenue or cost arrives only if
the number of units produce sold changes.
2. Cost can be separated in two components only.
Fixed and Variable
3. Graphically, behavior of total cost and revenues are
linear in relevant range.
4. Cost and Prices are constant for relevant range.
5. Single product or constant proportion of Multi
products
6. All cost can be added, subtracted or compare
without taking into account time value of money

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Lets Be Clear
Contribution Margin = Revenues – All
variable Cost

Also called variable unit income

Gross Margin = Revenues – Cost of

Goods Sold

Break Even Point

The quantity of output sold at which
total revenue equal to total cost.
The quantity of output at which
Operating Income is Zero

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 Break Even Units =
Fixed Cost/ Contribution Margin Per unit.

Break Even Revenue =

Fixed Cost / Contribution margin %

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Basic BE Chart

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4
The Contribution BE Chart

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The Profit Volume Chart

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 Target Operating Income =

(Fixed costs + Target operating income)

Cont margin per unit or Cont %

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Target Operating Income

Target Operating Income
= Target net Income / (1- Tax rate)
=Revenues – Variable Cost – Fixed Cost

Quantity of Output Units required

= (FC + (Target net Income)/(1-T) ) /
Contribution Margin Per Unit
For Amount divide by Contribution %

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Other Costs
Marginal Cost = Cost of Incremental Unit
Once BEP is reached the marginal cost of
additional unit is equal to Variable cost of
unit
Marginal Cost Pricing is marginal cost +
profit markup
Total Cost
Fixed Cost
Variable Cost
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If there are Multiple Cost Drivers

Take different Variable Costs e.g. per unit and per
order costs...
Operating Income =
Revenue – (VCA x No.of A) – (VCB x No.of B).. – FC
• E.g: No of packages is driver of the Cost of Do it all S/w
Package.. Say No of Photocopy
• No of customer is driver for Cost of preparing documents
for each customer .. No of Orders to be delivered
Operating Income = (Rs.200X40)- [(Rs.120 per
pack X 40) – (Rs.10 per customer X 10 customers)
– (Rs.2000)
OI = 8000-4800-400-2000 = 800

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Questions for Davey Bros
Calculate Break Even if
Decides to buy new machine costing 50,000/- with useful life of 7 yrs. and no
maintainece cost for first two year at SP of Re. 1, .75 & .50 each.
Assuming paper consumption to be in the ratio of 60:40 back to back and one side
If an office boy needs to be hired for Rs. 1500 pm.
If the business mix is 20:80, retail and wholesale for photocopy at Re. 1 and .50.
One year after the operations if we start allocating the overheads, Ravinders Salary,
Shop rent and electricity on equal basis across three segments.
How much ad expenses he can afford to get additional business of 50,000 photocopy
in the ratio of 20:80, retail and wholesale?
Cash profit Break even.
Considering target operating income of 30000 over and above salary cost.

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