Break even Analysis Flashcards
What is breakeven / cost-volume profit analysis?
Cost volume profit (CVP) analysis is the “study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix”
Fundamentals of Management Accounting. (2009). Kaplan Publishing CIMA Chapter 4
At break even point the:
total sales revenue = total costs
total sales revenues = fixed costs + variable costs
total contribution = total fixed costs
How do you calculate the breakeven point?
break-even point (in units) = total fixed costs / contribution per unit
What is the breakeven point for the company below?
Variable costs are £30 per unit
Fixed costs are £20,000 per month
Selling price is £50 per unit
20,000 / 30-30 = 1,000 units per month
What is the margin of safety?
The margin of safety is the difference between the expected level of sales and the breakeven point
It indicates by how much sales may decrease before a loss occurs
The larger the margin of safety the more likely it is that a profit will be made
Indicates vulnerability of profit to fall in demand (units or £)
A company manufactures a single product Variable costs are £30 per unit Fixed costs are £20,000 per month Selling price is £50 per unit Breakeven point in units = £20,000 £50 - £30 = 1,000 units per month If expected sales are 1,700 units per month what is the margin of safety?
Margin of safety = 1,700 units – 1,000 units
= 700 units or 41%
How do you calculate the sales required to make target profit?
(total fixed costs + target profit) / contribution per unit
A company manufactures a single product Variable costs are £30 per unit Fixed costs are £20,000 per month Selling price is £50 per unit Breakeven point in units = £20,000 £50 - £30 = 1,000 units per month if the required target profit is £10,000 what would the required sales be?
20,000+10,000 / 50-30 = 1,500 units
How do you calculate the contribution sales ratio?
contribution / sales x 100
How do you calculate the breakeven point in sales vale?
fixed costs / contribution sales ratio
What is a breakeven chart?
A basic breakeven chart records costs and revenues on vertical axis and level of activity on the horizontal axis
Lines are drawn to represent costs and sales revenue
The breakeven point can be read off where the sales revenue line crosses the total cost line
Managers may obtain a clearer understanding of CVP behaviour by using break-even charts
What is a profit-volume chart?
Another form of breakeven chart
Plots a single line depicting the profit or loss at each level of activity
The breakeven point is where this line crosses the horizontal axis
Main advantage of use is that it clearly depicts the effect on profit or loss and breakeven point any changes in variables
Sometimes called a profit graph or contribution-volume chart
What is multi-product breakeven analysis?
To be used when a business produces and sells several products
Assumes that sales will be in accordance with a pre-determined sales mix
Assumes that the sales mix remains constant
How do you calculate the weighted average contribution sales ratio?
(for multi products)
total contribution / total revenue
How do you calculate the multi product breakeven in revenue?
fixed costs / weighted average contribution ratio
How do you calculate the multi product target profit?
(fixed costs + required profit) / weighted average contribution sales ratio
