Breakeven analysis
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This document discusses breakeven analysis, also known as cost-volume-profit (CVP) analysis. CVP analysis examines the relationship between costs, revenue, output levels, and profit. It is used for short-term planning and decision making. The document defines key terms related to CVP analysis, such as breakeven point, contribution per unit, margin of safety, and marginal cost. Examples are provided to demonstrate how to calculate breakeven point, margin of safety, and the output level required to achieve a target profit using CVP analysis.
Breakeven analysis
- 1. 1/20/2014 Breakeven Analysis Breakeven analysis examines the short run relationship between changes in volume and changes in total sales revenue, expenses and net profit Also known as C-V-P analysis (Cost Volume Profit Analysis) M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 1
- 2. 1/20/2014 C-V-P analysis is an important tool in terms of short-term planning and decision making It looks at the relationship between costs, revenue, output levels and profit Short run decisions where C-V-P is used include choice of sales mix, pricing policy etc. How many units must be sold to breakeven? How many units must be sold to achieve a target profit? Should a special order be accepted? How will profits be affected if we introduce a new product or service? M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 2
- 3. 1/20/2014 Break even point-the point at which a company makes neither a profit or a loss. Contribution per unit-the sales price minus the variable cost per unit. It measures the contribution made by each item of output to the fixed costs and profit of the organisation. Margin of safety-a measure in which the budgeted volume of sales is compared with the volume of sales required to break even Marginal Cost – cost of producing one extra unit of output M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 3
- 4. 1/20/2014 Fixed Costs *Contribution per unit *Contribution per unit = Selling Price per unit – Variable Cost per unit M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 4
- 5. 1/20/2014 The difference between budgeted or actual sales and the breakeven point The margin of safety may be expressed in units or revenue terms Shows the amount by which sales can drop before a loss will be incurred Using the following data, calculate the breakeven point and margin of safety in units: Selling Price = €50 Variable Cost = €40 Fixed Cost = €70,000 Budgeted Sales = 7,500 units M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 5
- 6. 1/20/2014 Contribution = €50 - €40 = €10 per unit Breakeven point = €70,000/€10 = 7,000 units Margin of safety = 7500 – 7000 = 500 units What if a firm doesn’t just want to breakeven – it requires a target profit Contribution per unit will need to cover profit as well as fixed costs Required profit is treated as an addition to Fixed Costs M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 6
- 7. 1/20/2014 Using the following data, calculate the level of sales required to generate a profit of €10,000: Selling Price = €35 Variable Cost = €20 Fixed Costs = €50,000 Contribution = €35 – €20 = €15 Level of sales required to generate profit of €10,000: €50,000 + €10,000 €15 4000 units M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 7
- 8. 1/20/2014 Costs are either fixed or variable Fixed and variable costs are clearly discernable over the whole range of output Production = Sales One product/constant sales mix Selling price remains constant Efficiency remains unchanged Volume is the only factor affecting costs M M HASAN, LECTURER, AIE, HSTU, DINAJPUR 8