Chapter 10:

BREAKEVEN ANALYSIS AND LIMITING FACTOR

ANALYSIS
1. BREAKEVEN ANALYSIS AND CONTRIBUTION
• Reflect the interrelationships between costs, volume and profit at various
levels of activity
• If:
+ Total contribution > Fixed cost => profit
+ Total contribution < Fixed cost => loss
• Breakevent point: number of units sold at which neither a profit nor a loss
is made
• The contribution ratio: is a measure of how much contribution is earned
from each $1 of sales revenue
• Margin of safety: expresses the difference between the budgeted sales
revenue and breakeven sales
1. BREAKEVEN ANALYSIS AND CONTRIBUTION

• In $ = total fixed costs/contribution ratio

• In unit = total fixed costs/contribution per unit

• Contribution ratio = contribution/sales

• Margin of safety = (Budgeted sales -BEP)*100%/Budgeted sales

1. BREAKEVEN ANALYSIS AND CONTRIBUTION
$

Budgeted profit

Budgeted
Breakeven point contribution
Budgeted
variable costs
Fixed costs

Margin of
Budgeted fixed
safety
costs

Unit
1. BREAKEVEN ANALYSIS AND CONTRIBUTION

• Limitations:
- can only apply to a single product
- time - consuming
- assumes fixed costs are constant at all levels of output
- assumes that variable costs are the same per unit at all levels of output
- assumes that sales prices are constants at all levels of output
- assumes that production and sales are the same (inventory levels are ignored)
Example 1:
Expected sales 10,000 units at $8 = $80,000
Variable cost $5 per unit
Fixed costs $21,000
Requirement: compute the breakeven point
Solution:
The contribution per unit is 3
Contribution required to break even 21,000
Breakeven point 7000 units
In revenue 56,000
Breakeven in revenue 56,000 Contribution ratio 37.5%

It means if sales above $56,000 will result in profit of $3 per unit of extra sales and sales below $56,000
will mean a loss of $3 per unit for each unit by which sales fall short of 7,000 units. In other words,
profit will improve or worsen per unit of sales by the level of contribution per unit
Unit 6,999 7,000 7,001
Revenue 55,992 56,000 56,008
Less variable costs 34,995 35,000 35,005
Contribution 20,997 21,000 21,003
Less fixed costs 21,000 21,000 21,000
Profit (3) - 3
 Example 2:
Ex: Mal de Mer Co makes and sells a product which has a variable cost of $30 and which sells for $40.
Butgeted fixed costs are $70,000 and budgeted sales are 8,000 units
Requirement: calculate the breakeven point and the margin of safety
Solution:
Ex: Mal de Mer Co makes and sells a product which has a variable cost of $30 and which sells for $40.
Butgeted fixed costs are $70,000 and budgeted sales are 8,000 units
Requirement: calculate the breakeven point and the margin of safety

=> Solution
Breakeven point 7000 Units
Margin of safety 1000 Units
=> 12.5% of budget
Example 3:
Ex: CVP analysis
Butterfingers company makes a product which has a variable cost of $7 per unit
Requirement: If fixed costs are $63,000 per annum, calculate the selling price per unit if the company
wishes to break even with a sales volume of 12,000 units
Solution:
Ex: CVP analysis
Butterfingers company makes a product which has a variable cost of $7 per unit
Requirement: If fixed costs are $63,000 per annum, calculate the selling price per unit if the company
wishes to break even with a sales volume of 12,000 units

Contribution required = fixed cost 63000 $

Volume sales 12000 units
=> Require contribution per unit 5.25 $
Variable cost per unit 7 $
Selling price 12.25 $
 Example 4:
Ex: RB Co makes and sells a single product, for which variable costs are as follows
$ per unit
Materials 10
Labour 8
Production overhead 6
24
The sales price is $30 per unit, and fixed costs per annum are $68,000. The company
wished to make a profit of $16,000 per annum
Requirement: Determine the sales required to achive this profit
Solution:
Ex: RB Co makes and sells a single product, for which variable costs are as follows
$ per unit
Materials 10
Labour 8
Production overhead 6
24
The sales price is $30 per unit, and fixed costs per annum are $68,000. The company
wished to make a profit of $16,000 per annum
Requirement: Determine the sales required to achive this profit

=> Solution:
Required contribution = fixed cost + profit 84,000 $
=> Required sales
+ In unit 14,000 units
+ In revenue 420,000 $