BREAK EVEN ANALYSIS

EG 575
 Breakeven arithmetic

 At the breakeven point, there is no profit or loss and so

sales revenue – variable cost = total costs or total
contribution = fixed costs.
 At the breakeven point, sales revenue equals total costs
and there is no profit.
S = V + F
 where S = Sales revenue
 V = Total variable costs
 F = Total fixed costs
 Subtracting V from each side of the equation, we get:
 S - V = F, that is, total contribution = fixed costs
 breakeven arithmetic

Butterfingers Company makes a product

which has a variable cost of $7 per unit.
Required
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 to break even (=Fixed costs) = $63,000

Volume of sales = 12,000 units

Required contribution per unit (S – V) = $63,000 – 12,000 5.25

Variable cost per unit (V) = 7.00

Required sales price per unit (S) 12.25

 Target profits

 The target profit is achieved when sales revenue equals

variable costs plus fixed costs plus profit.
 Therefore the total contribution required for a target profit
= fixed costs + required profit.
 The target profit is achieved when: S = V + F + P,
 Where S = Sales revenue
 V = Variable costs
 F = Fixed costs
 P = required profit
 Subtracting V from each side of the equation, we get:
 S - V = F + P, so Total contribution required = F + P
 Example: target profits

RB Co makes and sells a single product, for

which variable costs are as follows.
 Direct materials $10
Direct labour $8
Variable production overhead $6
$24
The sales price is $30 per unit, and fixed costs
per annum are $68,000.
The company wishes to make a profit of
$16,000 per annum.
Required
Determine the sales required to achieve this
profit.
 Solution
Required contribution = fixed costs + profit =
$68,000 + $16,000 = $84,000
Required sales can be calculated in one of two
ways.
Required contribution/contribution per unit
=$84,000/$(30-24) = 14,000 units, or $420,000
in revenue.
Required contribution/(C/S) ratio =
$84,000/20% = $420,000 of revenue, or
14,000 units.
C/S ratio = ($30-$24)/$30 = $6/$30 = 0.2 =
20%
 Variations on breakeven and profit target calculations

• You may come across variations on breakeven

and profit target calculations in which you will
be expected to consider
• the effect of altering the selling price, variable
cost per unit or fixed cost.
 Example: change in selling price
 Stomer Cakes Co bake and sell a single type of
cake. The variable cost of production is 15c and
the current sales price is 25c. Fixed costs are
$2,600 per month, and the annual profit for the
company at current sales volume is $36,000. The
volume of sales demand is constant throughout
the year.
 The sales manager, Ian Digestion, wishes to raise
the sales price to 29c per cake, but considers that
a price rise will result in some loss of sales.
 Required

Ascertain the minimum volume of sales

required each month to raise the price to 29c.
 Solution

The minimum volume of demand which would

justify a price of 29c is one which would leave
total profit at least the same as before, ie
$3,000 per month.
Required profit should be converted into
required contribution, as follows.
Monthly fixed costs $2,600
Monthly profit, minimun required $3,000
Currently monthly contribution $5,600
Contribution per unit (25c- 15c) = 10c
Current monthly sales = 56,000 cakes
The minimum volume of sales required after the
price rise will be an amount which earns a
contribution of $5,600 per month, no worse than at
the moment.
The contribution per cake at a sales price of 29c
would be 14c.
Required sales= required contribution/contribution
per unit = $5,600/14c = 40,000 cakes per moth.