Chapter No.

4
Break-Even and Cost-
Volume-Profit Analysis

Week 11
Lecture 2
Please consult Exercise No. 1 of Chapter No.24 of your book.

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* 
Solution

(i) Contribution Margin (C/M) Ratio

= or

=1

= 1 – 0.4

= 0.6
*   Break-Even Point
(ii)

Break-even point =

= $1,200,000 / 0.6

= $2,000,000

(iii) Contribution Margin

Sales $4,500,000
- Variable expense $1,800,000
Contribution Margin $2,700,000
Please consult Exercise No. 2 of Chapter No.24 of your book.
Solution

(i) Break-Even Point for June

First, we need to calculate the fixed expense

Sales $265,000
-Variable expense 148,400
Contribution margin $116,600
-Profit 31,768
Fixed expense $84,832

**Contribution margin is available to cover fixed cost if something is

left after deducting fixed cost then the remainder is profit.
Contribution margin (CM) = Fixed expense + Profit
CM – Fixed expense = Profit
CM – Profit = Fixed expense
* 
Break-even point =

** C/M ratio = 1 – 0.56 = 0.44

= $84,832 / 0.44

= $192,800

(ii) June sales if the company made a profit of $10,560

Required Sales =

= $95,392 / 0.44 = $216,800

Proof of B.E. P

Sales $192,800
- Variable expense (0.56 of sales) 107,968
Contribution margin $ 84,832
- Fixed expense 84,832
Profit Nil

Proof of expected sales to earn profit of Rs.10,560

Sales $216,800
- Variable expense (0.56 of sales) 121,408
Contribution margin $ 95,392
- Fixed expense 84,832
Profit $10,560
Please consult Exercise No. 3 of Chapter No.24 of your book.
* 
Solution

(i) Break-Even Point in Dollars and in Units

Break-Even Point in Dollars

Break-even point =

= =

= $4,290 / 1 – 0.67

= $4,290 / 0.33 = $13,000

Break-Even Point in Units

= Break-Even Point in Dollars / Sales price per unit

= $13,000 / $2.5 per unit
= 5,200 Units

OR
* 
Break-Even Point in Units

= $4,290 / $0.825 per unit

= 5,200 units
Break-Even Point in Dollars

= Break-Even Point in Units * Sales price per unit

= 5,200 units * $2.50 per unit

= $13,000
Proof:

Sales (5,200 units * $2.50 per unit) $13,000

- Variable expense (5,200 units * $1.675 per unit) 8,710
Contribution margin $4,290
- Fixed expense $4,290
Profit Nil
*   Sales dollars required to produce a profit of $8,250
(ii)

Required Sales =

= $12,540 / 0.33

= $38,000
Please consult Exercise No. 4 of Chapter No.24 of your book.
Solution

Expenses
Fixed Variable
Direct Materials $206,200
Direct Labor 165,200
Factory Overhead $171,896 102,600
Marketing expenses 71,000 80,000
Administrative expenses 9,500 4,000
Total $252,396 $558,000
* 
Break-Even Point in Dollars

Break-even point in dollars =

= $252,396 / 1 – 0.62

= $252,396 / 0.38

= $664,200