Break-Even and Cost-Volume-

Profit Analysis
Break-even Analysis
 Determines at what level cost and
revenue are in equilibrium
 Break-even point
 Obtained directly by mathematical
calculations
 Usually presented in graphic form known
as break-even chart
Determining the Break-Even Point

 Each expense must be analyzed to

determine its fixed and variable portions
 Semi-variable expenses must be separated
into their fixed and variable components

 Fixed portion is stated as a total figure

 Variable portion is stated as a rate or
percentage
Determining the Break-Even Point

 Break-even analysis may be based on

 Historical data
 Future sales and costs
 Determining the Break-Even Point
 Contribution margin ratio (C/M ratio)
 Also known as marginal income ratio or Profit-volume ratio
 Contribution of each dollar towards covering fixed costs
and making a profit

Contribution margin ratio = 1 – (Variable costs/Sales)

OR
Contribution margin ratio =
unit contribution margin/unit sales
price

Contribution margin= sales – variable costs

Example
 The ABC Lodge has sales of $4500,000.
The fixed expense was $1,200,000 and the
variable expense totaled $1,800,000.

 Contribution margin ratio

 Contribution margin
Income Statement
 Sales xxx
 Less variable expenses xxx
 Total contribution margin xxx
 Less fixed expenses xxx
 Profit xxx
Determining the Break-Even Point
Break-even = Fixed costs
sales volume ($) Contribution margin ratio

Break-even = Fixed costs

sales volume ($) 1 – (Variable costs/Sales)
Determining the Break-Even Point

Break-even = Fixed costs

sales in units Contribution margin/unit

Break-even = Break-even sales in dollars

sales in units Unit sales price
Example
 The ABC Lodge has sales of $4500,000.
The fixed expense was $1,200,000 and the
variable expense totaled $1,800,000.

 Break even point in dollars

Equation Approach

 Profit=
Sales revenue-variable expenses-fixed expenses

 Profit=

 (Unit sales price)*(sales volume)- (unit variable

expenses)*(sales volume)-(Fixed expenses)
Determining the Break-Even Point

Break-even capacity %age =

Break-even sales in dollars
Normal sales volume in dollars

Margin of Safety ratio =

Sales – Break-even sales
Sales

Profit % = CM ratio x Margin of safety ratio

Break even Chart
Break even Chart
 Changes in Fixed expenses
 Original estimate new estimate
 Fixed utilities expenses $1,400 $2,600
 Total Fixed expenses 48,000 49,200

 Breakeven calculation 48,000 49,200

 (FC/unit contribution margin) $6 $6

 Break even point(units) 8,000units 8,200 units

 Break even point (dollars) $128,000 $131,200
Break even Chart
 Change in unit variable expenses
 Increase in unit variable expenses will
cause a decrease in unit contribution
margin.

 Break even will now be achieved at a higher

output level.
 Break even Chart
 Change in sales price
 Increase in sales price will cause an increase in unit
contribution margin.

 Break even will now be achieved at a lower output

level.

 However, careful analysis by the management is

required as the increase in sales price might also
cause a decline in output sold.
Profit-Volume Analysis
Target Net Profit
 We can use break-even analysis to find the
sales required to reach a target level of
profit.

 Number of sales units required to earn

target profit:
 = Fixed expenses+ Target net profit
Unit contribution margin
Example
 Calculate the number of units the company
needs to sell in order to realize a Profit of
$500,000?
 Given:
 Fixed costs= $100,000
 Sale price= $10
 Variable cost per unit= $5
Constructing a Break-even Chart

 Example:
 Fixed costs = $1,600,000
 Sales = $5,000,000
 Sales/unit = $4
 Variable cost/unit = $2.4/unit
 Construct Break-even chart