BREAKEVE

N
THE GRAPHICAL METHOD
THE FORMULAIC METHOD
THE MARGIN OF SAFETY
 THE GRAPHICAL
METHOD

TOTAL COSTS AND REVENUE($)

• THIS SHOWS THREE SETS OF
INFORMATION:
• FIXED COSTS – costs that remain
constant BREAKEVEN POINT!
• TOTAL COST (FIXED COSTS +
VARIABLE COSTS (fluctuate with units
of output)
• TOTAL SALES REVENUE (total value of
sales)
UNITS OF OUTPUT
In this diagram, the line OA represents the
variation of income at varying levels of
production activity ("output"). OB
represents the total fixed costs in the
business. As output increases, variable costs
are incurred, meaning that total costs (fixed
+ variable) also increase. At low levels of
output, Costs are greater than Income. At
the point of intersection, P, costs are exactly
equal to income, and hence neither profit
nor loss is made.
• LET’S USE THIS DATA TO DRAW OUR CHART:
• COMPANY R MAKES A SINGLE PRODUCT

• DIRECT LABOUR IS $12 per unit

• DIRECT MATERIALS IS $18 per UNIT
• VARIABLE OVERHEADS IS $5 per unit = $35

• FIXED COSTS ARE $200 000

• SELLING PRICE IS $45 per unit

• MAXIMUM CAPACITY IS 30 000 units

• 30 000*45 = $1 050 000
THE FORMULAIC METHOD:

• BREAKEVEN FORMULA =

• What are the variables here?

• FIXED COSTS – COSTS INCURRED REGARDLESS OF OUTPUT
• CONTRIBUTION PER UNIT = SELLING PRICE LESS VARIABLE COSTS PER UNIT
 • BREAKEVEN FORMULA =
• CALCULATE CONTRIBUTION COST:
• LET’S USE THIS DATA AGAIN:
• DIRECT LABOUR IS $12 per unit
• DIRECT MATERIALS IS $18 per UNIT
• DIRECT LABOUR IS $12 per unit
• VARIABLE OVERHEADS IS $5 per unit =
• DIRECT MATERIALS IS $18 per UNIT $35
• VARIABLE OVERHEADS IS $5 per unit = • =$45 - $35 = $10
$35

• FIXED COSTS ARE $200 000

• FIXED COSTS ARE $200 000
SO…
BEP =
• SELLING PRICE IS $45 per unit
BEP =
BEP =
• MAXIMUM CAPACITY IS 30 000 units
OR IN REVENUE – 20 000 *$45 = $900 000
• 30 000*45 = $1 050 000
 WE CAN NOW USE THIS DATA FOR MORE
CALCULATIONS:
MARGIN OF SAFETY = THE AMOUNT BY WHICH PRODUCTION
EXCEEDS BREAKEVEN. SO IF WE LOOK AT THE PREVIOUS
EXAMPLE, AT 25 000 UNITS OF OUTPUT THE MARGIN IS:

• BREAKEVEN POINT = $ 900 000

• OUTPUT VALUE AT 25 000 UNITS = 25 000 * 45 = $1 125
000
• THE MARGIN OF SAFETY IS $225 000, OR = = 25%
OR IN UNITS

225 000/45 = 5000 UNITS OF PRODUCTION

900 000/45 = 20 000 UNITS OF PRODUCTION

= = 25%

OR TO SEE HOW MANY UNITS WE NEED TO

PRODUCE TO MEET A PROFIT TARGET!
TARGET PROFIT IS $150 000

= = 35 000 UNITS OF PRODUCTION