This document provides an overview of cost-volume-profit (CVP) analysis and break-even analysis. It defines break-even as the point where total revenue equals total costs, and neither profit nor loss is made. Break-even analysis determines the sales volume needed for a product or service to cover its costs. The document discusses using break-even analysis to measure profit and losses at different production levels, and to predict the effects of changes in sales price, costs, and efficiency. It also covers the assumptions, uses, and limitations of break-even analysis, as well as different methods for conducting the analysis.
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
This document discusses cost-volume-profit (CVP) analysis and the concept of contribution margin (CM). It defines CM as sales revenue minus variable costs and explains that CM is used to cover fixed costs and contribute to profit. The document also discusses assumptions of CVP analysis and applications such as break-even analysis, calculating profit at different sales levels, and measuring operating leverage.
CVP analysis is an important tool for profit planning that provides information on break-even points, the sensitivity of profits to changes in output or costs, and the amount of profit expected for projected sales levels. It analyzes the behavior of costs with changes in volume and the interdependence of volume, costs, and profits. The break-even point is the level of activity where total revenues equal total costs, representing the minimum level of activity needed to cover total fixed costs. It is calculated as total fixed costs divided by the contribution margin per unit.
The document discusses break-even analysis, which is used to determine the sales volume needed for a business to make a profit. It defines key concepts like fixed costs, variable costs, revenue, and profit. The break-even point is where total costs equal total revenue, resulting in no profit or loss. The document provides the formula for calculating break-even point and gives examples of how it is used. Managerial uses of break-even analysis include determining a selling price for a desired profit, calculating sales needed to reach a target profit, and making production and investment decisions.
Marginal costing is a technique where only variable costs are treated as product costs and fixed costs are treated as period costs. It focuses on marginal cost and contribution margin. Absorption costing is a technique where both fixed and variable costs are treated as product costs. Three key differences are:
1) In marginal costing, only variable costs are considered as inventory costs while in absorption costing, both fixed and variable costs are considered as inventory costs.
2) Profits are calculated based on contribution in marginal costing while in absorption costing, profits are calculated by deducting total costs from sales.
3) Inventory valuation and profit determination methods are different between the two techniques.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
Cost and Management Accounting II Chapter 1.pdfalemayehu73
CVP (cost-volume-profit) analysis is a tool that examines the relationship between a firm's costs, volume of production/sales, and profits. It can be used to determine the break-even point, which is when total revenue equals total costs. There are three methods for conducting a CVP analysis: contribution margin approach, equation approach, and graphical approach. The document provides examples of how to use the equation and contribution margin approaches to calculate a company's break-even point in units and dollars. Key assumptions of the CVP model include constant costs and sales, no changes in production capacity, and equal sales and production levels.
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
This document discusses cost-volume-profit (CVP) analysis and the concept of contribution margin (CM). It defines CM as sales revenue minus variable costs and explains that CM is used to cover fixed costs and contribute to profit. The document also discusses assumptions of CVP analysis and applications such as break-even analysis, calculating profit at different sales levels, and measuring operating leverage.
CVP analysis is an important tool for profit planning that provides information on break-even points, the sensitivity of profits to changes in output or costs, and the amount of profit expected for projected sales levels. It analyzes the behavior of costs with changes in volume and the interdependence of volume, costs, and profits. The break-even point is the level of activity where total revenues equal total costs, representing the minimum level of activity needed to cover total fixed costs. It is calculated as total fixed costs divided by the contribution margin per unit.
The document discusses break-even analysis, which is used to determine the sales volume needed for a business to make a profit. It defines key concepts like fixed costs, variable costs, revenue, and profit. The break-even point is where total costs equal total revenue, resulting in no profit or loss. The document provides the formula for calculating break-even point and gives examples of how it is used. Managerial uses of break-even analysis include determining a selling price for a desired profit, calculating sales needed to reach a target profit, and making production and investment decisions.
Marginal costing is a technique where only variable costs are treated as product costs and fixed costs are treated as period costs. It focuses on marginal cost and contribution margin. Absorption costing is a technique where both fixed and variable costs are treated as product costs. Three key differences are:
1) In marginal costing, only variable costs are considered as inventory costs while in absorption costing, both fixed and variable costs are considered as inventory costs.
2) Profits are calculated based on contribution in marginal costing while in absorption costing, profits are calculated by deducting total costs from sales.
3) Inventory valuation and profit determination methods are different between the two techniques.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
Cost and Management Accounting II Chapter 1.pdfalemayehu73
CVP (cost-volume-profit) analysis is a tool that examines the relationship between a firm's costs, volume of production/sales, and profits. It can be used to determine the break-even point, which is when total revenue equals total costs. There are three methods for conducting a CVP analysis: contribution margin approach, equation approach, and graphical approach. The document provides examples of how to use the equation and contribution margin approaches to calculate a company's break-even point in units and dollars. Key assumptions of the CVP model include constant costs and sales, no changes in production capacity, and equal sales and production levels.
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and sales volume affect a company's profits. It requires identifying all costs as either variable or fixed. CVP analysis explores the relationship between costs, revenues, and activity level to measure how costs and profits vary with sales volume. It is used for forecasting profits, budget planning, pricing decisions, determining sales mix, and more. The three elements of CVP are costs, volume, and profit. The break-even point is the sales volume where total revenue equals total costs. Relevant costs must differ between alternatives and affect the decision. Sunk costs do not affect decisions as they cannot be changed.
Break-even analysis is a technique that allows businesses to determine the sales volume needed to break even. It involves classifying costs as fixed or variable and calculating the break-even point, which is where total revenue equals total costs. Break-even analysis can be used to understand how changes in output, price, or costs affect profits. While useful for planning, it has limitations as it assumes costs change linearly with volume and ignores factors like multiple products or price changes.
Break-even analysis is a technique that allows businesses to determine the sales volume needed to break even. It involves classifying costs as fixed or variable and calculating the break-even point, which is where total revenue equals total costs. Break-even analysis can be used to understand how changes in output, price, or costs affect profits. While useful for planning, it has limitations as it assumes costs change linearly with volume and ignores factors like multiple products or price changes.
Based on the information provided, my advice to the management would be:
1. Do not close down department B immediately as it is contributing Rs. 2,000 towards fixed costs and profits even though it is showing a loss.
2. Close down department A immediately as it is showing a negative contribution, meaning it is increasing the total losses.
3. Retain departments B, C and D as they are contributing positively towards profits.
4. Review the product mix and costs regularly to ensure only profitable departments are retained for maximizing overall profits.
The document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, costs, prices, and sales mix affect profits. It outlines assumptions of CVP, describes techniques like break-even analysis, and provides examples of using CVP to determine sales volume needed to achieve a profit target or how profits would change with cost/price increases. The document also includes a case study on a tea company analyzing how much variable costs must decrease to maintain profits as sales drop 40% due to eliminating a middleman.
This document provides an overview of break even analysis for a management accounting class. It defines break even analysis as a tool that determines the sales volume needed for a business to start making a profit. It then discusses key break even analysis concepts like fixed and variable costs, how to calculate the break even point using the contribution margin approach, how to determine the margin of safety, and how target profits can be incorporated. The document also provides examples of calculating break even points and sales levels needed for a target profit. It concludes by discussing limitations of break even analysis and comparing absorption and marginal costing approaches.
Here are the solutions to the numerical problems:
i) BEP in units = Total Fixed Cost / Contribution per unit
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)
= 1,50,000/Rs. 5
= 30,000 units
ii) BEP in amount = Total Fixed Cost / P/V Ratio
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)/Rs. 15
= 1,50,000/Rs. 5/Rs. 15
= Rs. 1,50,000
iii) P/V Ratio = Contribution/Sales
= (Selling Price - Variable Cost)/Selling
This document discusses different approaches to cost-based pricing. It defines cost-based pricing as using the cost of production as the basis for setting a product's price. The document outlines several types of cost-based pricing like cost-plus pricing, full cost pricing, and target profit pricing. It also discusses the advantages and disadvantages of using a cost-based approach to pricing.
Presentation on CVP Analysis, Break Even Point & Applications of Marginal Cos...Leena Kakkar
CVP analysis helps managers understand the relationship between cost, volume, and profit by examining how price, volume, variable costs, fixed costs, and product mix interact. It is used to determine what products to make/sell, pricing policies, marketing strategies, and facility investments. The break-even point is where total costs and revenues are equal, and no profit or loss has occurred. Marginal costing is used to set optimal prices, evaluate price reductions, choose product mixes, calculate safety margins, and set different prices for different customers.
CVP (cost-volume-profit) analysis examines the relationships between costs, volume, and profit. It is a useful short-term planning tool for decision making. Key elements include break-even point, contribution margin, and profit-volume charts. CVP assumes fixed costs are constant at all activity levels and unit variable costs are also constant. It can be applied to single or multiple products if they have a fixed sales mix. The document provides an example CVP analysis for a company with three hair product lines.
This document discusses break even analysis, which determines the sales volume needed for a business to make a profit. It explains that break even analysis helps managers make informed decisions about new products, equipment, and pricing. The document provides the algebraic formula for calculating break even point and illustrates break even analysis for a company called Surf. Examples are given of Rajiv Gandhi Setu bridge, which fell short of its break even daily collection target, and Jumbo King Vada Pav restaurants, which achieved success and sustained profits through strategic franchise expansion near railway stations.
Marginal costing is a method used to determine the cost of increasing or decreasing production. It includes both fixed and variable costs, with fixed costs only included if production is being increased. The marginal cost is calculated as the change in total cost from a one unit change in production. Absorption costing is an accounting method that allocates all production costs, including fixed costs, to inventory. This increases the reported value of inventory and costs per unit. Key steps include developing cost pools, determining usage, and calculating allocation rates to distribute costs to each unit produced.
This document discusses cost-volume-profit (CVP) analysis and its applications in business decision making. It defines fixed and variable costs and explains how CVP analysis explores the relationship between costs, activity levels, and profits. A key aspect of CVP is calculating the break-even point, which is the sales volume where total revenue equals total costs, resulting in zero profit. The document also outlines assumptions of break-even analysis and how to calculate break-even points using equations or graphs. It provides examples of using CVP to determine profit levels at different volumes and to calculate sales needed to achieve a target profit.
This document discusses break even analysis. It defines financial break even point as the level of sales or revenue needed to cover all expenses and reach zero profit. It provides the formula to calculate break even point using total fixed costs and contribution margin per unit. An example is given of a company calculating its break even point in units and revenue. Key assumptions and uses of break even analysis are outlined, including planning, pricing strategy, and investment decisions. Graphical and cash break even analysis are also introduced.
This document discusses cost based pricing. Cost based pricing sets the price of a product based on the costs to produce it, including direct costs, indirect costs, and an additional amount for profit. The key advantages are that it is simple and flexible to adjust prices as costs change. However, it ignores factors like demand, competition, and brand positioning. There are different types of cost based pricing like cost plus pricing, full cost pricing, and target profit pricing.
A case study of cost analysis and pricing decision of smeEnamul Islam
M. Keramot Ali Hall Dining is a sole proprietorship located on the campus of Patuakhali Science and Technology University. The report analyzes the dining hall's costs and profits over a one month period. Key findings include inaccurate sales records and an imperfect pricing system. Recommendations are to implement proper accounting practices, track sales volumes more carefully, and improve the costing system to enhance decision making.
This document contains an analysis of costs, market forces, and competitors for PGMAX (2014-2015). It includes sections on cost concepts, cost functions, short-run and long-run costs, economies of scale, and cost-volume-profit analysis. Market and competitor analyses cover market size, share, trends, Porter's Five Forces model, and assessing strengths and weaknesses of competitors. Break-even analysis calculations are shown for a example company.
2. Cost Volume Profit Analysis - a tool for decision makingSimmiAgrawal8
This document provides an overview of cost-volume-profit (CVP) analysis. It defines key CVP terms like fixed costs, variable costs, contribution margin, break-even point, and margin of safety. It also shows examples of how to calculate these measures using numerical data. The purpose of CVP analysis is to understand how costs and profits are affected by changes in sales volume, price, or costs. Managers can use CVP to make decisions around pricing, marketing strategy, and product viability.
This document provides information about cost-volume-profit (CVP) analysis, which is a tool used by sellers to determine product pricing and sales volume levels. It discusses key CVP analysis terms like fixed costs, variable costs, sales revenue, profit, contribution margin, break-even point, and more. Examples are provided to demonstrate how to calculate items like sales, costs, profits, and contribution margin using information given about price, quantity, revenues, and expenses. The document is intended to explain the basic concepts and calculations involved in CVP analysis.
The document discusses quality assurance (QA) at Sunyani Technical University (STU) in Ghana. It outlines the background and importance of QA for universities. It describes STU's stakeholders in quality and the stages of its QA process. Specific QA activities at STU include course evaluations, admissions verification, and accreditation support. Benefits of effective QA include improved performance, satisfaction, and institutional reputation. Challenges include late exam submissions and delays in accreditation documentation. The conclusion emphasizes that QA is STU's responsibility and requires cooperation across the university.
This document discusses how to build trust in relationships. It emphasizes being transparent by being easily readable, open, and vulnerable. It also stresses the importance of being responsive by giving and receiving feedback graciously. Additionally, it recommends using caring by showing others they are important and respecting them. The document also advises being sincere so your words and actions match, and being trustworthy by keeping your agreements. Overall, it provides guidance for establishing trust through open communication and reliability.
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Cost-volume-profit (CVP) analysis is used to determine how changes in costs and sales volume affect a company's profits. It requires identifying all costs as either variable or fixed. CVP analysis explores the relationship between costs, revenues, and activity level to measure how costs and profits vary with sales volume. It is used for forecasting profits, budget planning, pricing decisions, determining sales mix, and more. The three elements of CVP are costs, volume, and profit. The break-even point is the sales volume where total revenue equals total costs. Relevant costs must differ between alternatives and affect the decision. Sunk costs do not affect decisions as they cannot be changed.
Break-even analysis is a technique that allows businesses to determine the sales volume needed to break even. It involves classifying costs as fixed or variable and calculating the break-even point, which is where total revenue equals total costs. Break-even analysis can be used to understand how changes in output, price, or costs affect profits. While useful for planning, it has limitations as it assumes costs change linearly with volume and ignores factors like multiple products or price changes.
Break-even analysis is a technique that allows businesses to determine the sales volume needed to break even. It involves classifying costs as fixed or variable and calculating the break-even point, which is where total revenue equals total costs. Break-even analysis can be used to understand how changes in output, price, or costs affect profits. While useful for planning, it has limitations as it assumes costs change linearly with volume and ignores factors like multiple products or price changes.
Based on the information provided, my advice to the management would be:
1. Do not close down department B immediately as it is contributing Rs. 2,000 towards fixed costs and profits even though it is showing a loss.
2. Close down department A immediately as it is showing a negative contribution, meaning it is increasing the total losses.
3. Retain departments B, C and D as they are contributing positively towards profits.
4. Review the product mix and costs regularly to ensure only profitable departments are retained for maximizing overall profits.
The document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, costs, prices, and sales mix affect profits. It outlines assumptions of CVP, describes techniques like break-even analysis, and provides examples of using CVP to determine sales volume needed to achieve a profit target or how profits would change with cost/price increases. The document also includes a case study on a tea company analyzing how much variable costs must decrease to maintain profits as sales drop 40% due to eliminating a middleman.
This document provides an overview of break even analysis for a management accounting class. It defines break even analysis as a tool that determines the sales volume needed for a business to start making a profit. It then discusses key break even analysis concepts like fixed and variable costs, how to calculate the break even point using the contribution margin approach, how to determine the margin of safety, and how target profits can be incorporated. The document also provides examples of calculating break even points and sales levels needed for a target profit. It concludes by discussing limitations of break even analysis and comparing absorption and marginal costing approaches.
Here are the solutions to the numerical problems:
i) BEP in units = Total Fixed Cost / Contribution per unit
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)
= 1,50,000/Rs. 5
= 30,000 units
ii) BEP in amount = Total Fixed Cost / P/V Ratio
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)/Rs. 15
= 1,50,000/Rs. 5/Rs. 15
= Rs. 1,50,000
iii) P/V Ratio = Contribution/Sales
= (Selling Price - Variable Cost)/Selling
This document discusses different approaches to cost-based pricing. It defines cost-based pricing as using the cost of production as the basis for setting a product's price. The document outlines several types of cost-based pricing like cost-plus pricing, full cost pricing, and target profit pricing. It also discusses the advantages and disadvantages of using a cost-based approach to pricing.
Presentation on CVP Analysis, Break Even Point & Applications of Marginal Cos...Leena Kakkar
CVP analysis helps managers understand the relationship between cost, volume, and profit by examining how price, volume, variable costs, fixed costs, and product mix interact. It is used to determine what products to make/sell, pricing policies, marketing strategies, and facility investments. The break-even point is where total costs and revenues are equal, and no profit or loss has occurred. Marginal costing is used to set optimal prices, evaluate price reductions, choose product mixes, calculate safety margins, and set different prices for different customers.
CVP (cost-volume-profit) analysis examines the relationships between costs, volume, and profit. It is a useful short-term planning tool for decision making. Key elements include break-even point, contribution margin, and profit-volume charts. CVP assumes fixed costs are constant at all activity levels and unit variable costs are also constant. It can be applied to single or multiple products if they have a fixed sales mix. The document provides an example CVP analysis for a company with three hair product lines.
This document discusses break even analysis, which determines the sales volume needed for a business to make a profit. It explains that break even analysis helps managers make informed decisions about new products, equipment, and pricing. The document provides the algebraic formula for calculating break even point and illustrates break even analysis for a company called Surf. Examples are given of Rajiv Gandhi Setu bridge, which fell short of its break even daily collection target, and Jumbo King Vada Pav restaurants, which achieved success and sustained profits through strategic franchise expansion near railway stations.
Marginal costing is a method used to determine the cost of increasing or decreasing production. It includes both fixed and variable costs, with fixed costs only included if production is being increased. The marginal cost is calculated as the change in total cost from a one unit change in production. Absorption costing is an accounting method that allocates all production costs, including fixed costs, to inventory. This increases the reported value of inventory and costs per unit. Key steps include developing cost pools, determining usage, and calculating allocation rates to distribute costs to each unit produced.
This document discusses cost-volume-profit (CVP) analysis and its applications in business decision making. It defines fixed and variable costs and explains how CVP analysis explores the relationship between costs, activity levels, and profits. A key aspect of CVP is calculating the break-even point, which is the sales volume where total revenue equals total costs, resulting in zero profit. The document also outlines assumptions of break-even analysis and how to calculate break-even points using equations or graphs. It provides examples of using CVP to determine profit levels at different volumes and to calculate sales needed to achieve a target profit.
This document discusses break even analysis. It defines financial break even point as the level of sales or revenue needed to cover all expenses and reach zero profit. It provides the formula to calculate break even point using total fixed costs and contribution margin per unit. An example is given of a company calculating its break even point in units and revenue. Key assumptions and uses of break even analysis are outlined, including planning, pricing strategy, and investment decisions. Graphical and cash break even analysis are also introduced.
This document discusses cost based pricing. Cost based pricing sets the price of a product based on the costs to produce it, including direct costs, indirect costs, and an additional amount for profit. The key advantages are that it is simple and flexible to adjust prices as costs change. However, it ignores factors like demand, competition, and brand positioning. There are different types of cost based pricing like cost plus pricing, full cost pricing, and target profit pricing.
A case study of cost analysis and pricing decision of smeEnamul Islam
M. Keramot Ali Hall Dining is a sole proprietorship located on the campus of Patuakhali Science and Technology University. The report analyzes the dining hall's costs and profits over a one month period. Key findings include inaccurate sales records and an imperfect pricing system. Recommendations are to implement proper accounting practices, track sales volumes more carefully, and improve the costing system to enhance decision making.
This document contains an analysis of costs, market forces, and competitors for PGMAX (2014-2015). It includes sections on cost concepts, cost functions, short-run and long-run costs, economies of scale, and cost-volume-profit analysis. Market and competitor analyses cover market size, share, trends, Porter's Five Forces model, and assessing strengths and weaknesses of competitors. Break-even analysis calculations are shown for a example company.
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This document provides an overview of cost-volume-profit (CVP) analysis. It defines key CVP terms like fixed costs, variable costs, contribution margin, break-even point, and margin of safety. It also shows examples of how to calculate these measures using numerical data. The purpose of CVP analysis is to understand how costs and profits are affected by changes in sales volume, price, or costs. Managers can use CVP to make decisions around pricing, marketing strategy, and product viability.
This document provides information about cost-volume-profit (CVP) analysis, which is a tool used by sellers to determine product pricing and sales volume levels. It discusses key CVP analysis terms like fixed costs, variable costs, sales revenue, profit, contribution margin, break-even point, and more. Examples are provided to demonstrate how to calculate items like sales, costs, profits, and contribution margin using information given about price, quantity, revenues, and expenses. The document is intended to explain the basic concepts and calculations involved in CVP analysis.
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Here is a graphical representation of the break even analysis using the data provided:
Units Sold
Fixed costs = $5000
Variable cost per unit = $3
Selling price per unit = $5
Total Costs
$5000
$15000
$25000
Total Revenue
$0
$2500
$5000
$7500
$10000
$12500
$15000
$17500
$20000
$22500
Break Even Point
800 units
The break even point is reached at 800 units where total revenue equals total costs. The total fixed costs line is drawn horizontally at $5000. The total costs line is drawn starting from the total fixed costs line
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2. Aims for today
• To understand
what break even
means
•How it can be used
to assist businesses
in their planning
23/08/2023 Kwame Oduro Amoako (PhD)
3. What does break even mean?
• Break even is where a firms TOTAL REVENUE is
the same as its TOTAL COSTS
• At the break even point, a firm is neither making a PROFIT
nor A LOSS
Kwame Oduro Amoako (PhD)
23/08/2023
4. Break-even analysis?
• A break-even analysis is a useful tool for determining at
what point your company, or a new product or
service, will be profitable.
• Put another way, it's a financial calculation used to
determine the number of products or services you need to
sell to at least cover your costs.
• The break even analysis is important to business owners
and managers in determining how many units (or revenues)
are needed to cover fixed and variable expenses of the
business.
23/08/2023 Kwame Oduro Amoako (PhD)
5. Uses of break-even analysis
Break-even analysis enables a business organization to:
• Measure profit and losses at different levels of production
and sales.
• Predict the effect of changes in sales prices on quantities to
be sold.
• Analyze the relationship between fixed and variable costs.
• Predict the effect of cost and efficiency changes on
profitability.
23/08/2023 Kwame Oduro Amoako (PhD)
6. Assumptions of break-even
• All costs are divided into fixed and variable costs.
• Fixed costs will remain constant and will not change according to the
level of production.
• Variable costs will change in direct proportion according to the level
of production.
• Selling price remain constant even though there exists competition or
any change in the volume of production.
• The number of units of production is equal to sales. It means that
there is no opening or closing stock.
• The operating efficiency of the company remains the same.
• There is only one product or product mix in the case of many
products will remain unchanged.
23/08/2023 Kwame Oduro Amoako (PhD)
7. Limitation of break even analysis
• Break-even analysis is based on the assumption that all costs and
expenses can be clearly separated into fixed and variable
components.
• It assumes that fixed costs remain constant at all levels of activity. It
should be noted that fixed costs tend to vary beyond a certain level
of activity.
• It assumes that variable costs vary proportionately with the volume of
output is not true.
• The assumption that selling price remains unchanged gives a straight
revenue line which may not be true.
• The assumption that only one product is produced or that product
mix will remain unchanged is difficult to find in practice.
• It assumes that the business conditions may not change which is not
true.
23/08/2023 Kwame Oduro Amoako (PhD)
8. Methods of conducting break even
analysis
• Graphical method
• Use of contribution margin method
• Use of equation method
23/08/2023 Kwame Oduro Amoako (PhD)
9. Task 2: Draw the break even chart using
your data
1. Label the vertical axis “sales and costs in pounds”.
2. Label the horizontal axis “sales/production (units)”.
3. Draw on the BE point
4. Draw a horizontal line for total fixed costs.
5. Starting at the Total costs point, draw the total cost line going through
the break even point.
6. Starting at zero, draw the total revenue line through the break even.
7. Where the sales revenue crosses the total costs line is the break
even point.
8. Read off the units of sales to give the break even level of sales.
9. The gap between the total costs line and sales revenue line after the
break even point represents the level of profit.
Kwame Oduro Amoako (PhD)
23/08/2023
10. Graphical method of Breakeven
GH¢
Units Sold
23/08/2023 Kwame Oduro Amoako (PhD)
15. Calculating the break even point
Kwame Oduro Amoako (PhD)
Step 1.
Identify fixed & variable costs – add them together to get the TOTAL
costs
Step 2.
Calculate the TOTAL REVENUE
23/08/2023
16. Task 1: Calculating break even
Kwame Oduro Amoako (PhD)
• Use the following to
complete the table:
• FC=GH¢2000
• VC=GH¢2 per unit
• Selling price=GH¢4
23/08/2023
18. The break even chart
Kwame Oduro Amoako (PhD)
23/08/2023
19. Margin of safety formula
• The difference between the planned number of
units or actual sales and the number of units of
sales at break even point.
• From the table and chart
They can make:
• 2,000 units potentially – 1,000 actual units at break even
• = 1,000 units Margin of safety
23/08/2023 Kwame Oduro Amoako (PhD)
20. Task 3: Draw the margin of safety
Kwame Oduro Amoako (PhD)
23/08/2023
21. Self test
• KFC operate a hot dog stand
in their branch at Bekwai
Roundabout.
• The wages at the stand costs
GH¢200 per week. Each hot
dog needs one bread roll at
20p, one sausage at 25p and
sauces at 5p.
• The selling price of each hot
dog is GH¢1
23/08/2023 Kwame Oduro Amoako (PhD)
22. Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY FIXED
COSTS
VARIABLE
COSTS
TOTAL
COSTS
TOTAL
REVENUE
PROFIT OR
LOSS?
100
150
200
250
300
350
400
450
500
550
600
650
23/08/2023 Kwame Oduro Amoako (PhD)
23. Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY FIXED
COSTS
VARIABLE
COSTS
TOTAL
COSTS
TOTAL
REVENUE
PROFIT OR
LOSS?
100 200 50 250 100 -150
150 200 75 275 150 -125
200 200 100 300 200 -100
250 200 125 325 250 -75
300 200 150 350 300 -50
350 200 175 375 350 -25
400 200 200 400 400 0
450 200 225 425 450 25
500 200 250 450 500 50
550 200 275 475 550 75
600 200 300 500 600 100
650 200 325 525 650 125
23/08/2023 Kwame Oduro Amoako (PhD)
24. Next task
1. Draw a Break Even chart for the Hot Dog business -
Ensure your chart is FULLY and CLEARLY labelled
2. Draw on the margin of safety
3. Explain how the Break even analysis will help Grace
and Joe
4. Discuss what strategies Grace and Joe could use to
enable them to reach their break even point quicker
5. Evaluate which of these strategies would be best for
the business
23/08/2023 Kwame Oduro Amoako (PhD)
26. Contribution Margin
• One of the key relationships in CVP analysis is contribution margin
(CM).
• Contribution margin is the remaining of a product price after
deducting variable cost per unit.
• Contribution margin is a product's price minus all associated
variable costs, resulting in the incremental profit earned for each unit
sold.
• The total contribution margin generated by an entity represents the
total earnings available to pay for fixed expenses and to generate a
profit
• The CM is then available to cover fixed costs and to contribute
income for the company.
23/08/2023 Kwame Oduro Amoako (PhD)
27. Unit Contribution Margin
Views differ as to the best way to express contribution margin
(CM). Some favor a per unit basis.
• At Kuma Wood Videos, the contribution margin is GH¢2.
Unit Selling Price
Unit Variable
Cost
Contribution
Margin
- =
GH¢5 GH¢3 GH¢2
- =
CM per unit indicates that for every CD sold, Kuma Wood
Video will have GH¢200 to cover fixed costs and
contribute to income.
23/08/2023 Kwame Oduro Amoako (PhD)
28. Contribution Margin
• For example, assume that Kumawood Video sells 100,000 CDs in
one month,
• sales are GH¢500,000 (100,000 x GH¢5) and
• variable costs are GH¢300,000 (100,000 x GH¢3).
• Thus, total contribution is GH¢200,000, computed as follows:
Sales Variable Costs Contribution
- =
GH¢500,000 GH¢300,000 GH¢200,000
- =
23/08/2023 Kwame Oduro Amoako (PhD)
29. Contribution Margin Ratio
Others prefer to use a contribution margin ratio.
• At Kuma Wood Video, the contribution margin
ratio is 40%.
Contribution
Margin per Unit
Unit Selling Price
Contribution
Margin Ratio
=
GH¢2 GH¢5 40%
=
The CM ratio means that 40 cents of each sales dollar
(GH¢1 x 40%) is available to apply to fixed costs and
to contribute to income.
23/08/2023 Kwame Oduro Amoako (PhD)
30. Break even formulae approach
• Break-even point (in units) = Fixed Costs
Contribution/unit
• Break-even point (in sales value) = Fixed Costs x S.P
Contribution/unit
OR Break-even point (in units) x Selling price
OR = Fixed Costs x 1
C/S ratio
• C/S ratio = Contribution/unit x 100
Sales price per unit
23/08/2023 Kwame Oduro Amoako (PhD)
31. Break even formulae approach
cont’d
• Level of sales to result in target profit (in units)
= Fixed Costs + Target Profit
Contribution/unit
• Level of sales to result in target profit (in sales value)
= Fixed Costs + Target Profit x Sales Price/unit
Contribution per unit
• Level of sales to result in target profit after tax (units)
23/08/2023 Kwame Oduro Amoako (PhD)
32. Break even formulae approach
cont’d
• Margin of Safety in units = Total Profit
Contribution/unit
• Margin of Safety in sales value
= Total Sales – Break-even point in sales.
OR
Total Profit
C/S ratio
23/08/2023 Kwame Oduro Amoako (PhD)
33. Illustration 1
A company makes a single product with a sales price of GH¢10 and a marginal
cost of GH¢6. Fixed costs are GH¢60,000 p.a. Calculate:
a) Contribution per unit
b) Number of units to break even.
c) Sales at break-even point.
d) C/S ratio
e) What number of units will need to be sold to achieve a profit of GH¢20,000
p.a.
f) What level of sales will achieve a profit of GH¢20,000 p.a.
g) If the taxation rate is 40% how many units will need to be sold to make a
profit after tax of GH¢20,000 p.a.?
h) Because of increasing costs the marginal cost is expected to rise to
GH¢6.50 per unit and fixed costs to GH¢70,000 p.a. If the selling price
cannot be increased what will be the number of units required to maintain
a profit of GH¢20,000 p.a.? (Ignore tax).
23/08/2023 Kwame Oduro Amoako (PhD)
34. Solution
(a)Contribution per unit = Selling price per unit – Variable Cost
= GH ¢10 - GH¢6
= GH¢4
(b) Break-even point (in units) = GH¢60,000
GH¢4 = 15,000 units
(c) Break-even point (in sales value) = GH¢60,000 x GH ¢10
GH¢4 = GH¢150,000
(d) C/S ratio = GH¢4 x 100
GH¢10 = 40%
23/08/2023 Kwame Oduro Amoako (PhD)
35. Solution cont’d
(e) Number of units for target profit = GH¢60,000 + GH¢20,000
GH¢4
= 20,000 units
(f) Sales for target profit = GH¢60,000 + GH¢20,000 x GH¢10
GH¢4
=GH¢200,000
(g) Number of units for target profit after tax =GH¢ 60,000+GH¢20,000
1-0.4
GH¢4
=23,333 unit
(h) Number of units for target profit = GH¢70,000 + GH¢20,000
GH¢3.50
= 25,714 units
23/08/2023 Kwame Oduro Amoako (PhD)
37. Sales Mix Break-even Point
• Sales mix is the proportion in which two or more
products are sold.
• For the calculation of break-even point for sales
mix, following assumptions are made in addition to
those already made for CVP analysis:
• The proportion of sales mix must be predetermined.
• The sales mix must not change within the relevant
time period.
23/08/2023 Kwame Oduro Amoako (PhD)
38. Sales Mix Break-even Point
• The calculation method for the break-even point of sales mix is
based on the contribution approach method.
• Since we have multiple products in sales mix therefore it is most
likely that we will be dealing with products with different
contribution margin per unit and contribution margin ratios.
• This problem is overcome by calculating weighted average
contribution margin per unit and contribution margin ratio.
• These are then used to calculate the break-even point for sales
mix.
23/08/2023 Kwame Oduro Amoako (PhD)
39. Illustration:
Following information is related to sales mix of product A, B
and C. Calculate the break-even point in units and in dollars.
Product A B C
Sales Price per
Unit
GH¢15 GH¢21 GH¢36
Variable Cost
per Unit
GH¢9 GH¢14 GH¢19
Sales Mix
Percentage
20% 20% 60%
Total Fixed Cost GH¢40,000
23/08/2023 Kwame Oduro Amoako (PhD)
40. Solution
Step 1: Calculate the contribution margin
Product A B C
Sales Price per
Unit
GH¢15 GH¢21 GH¢36
− Variable Cost
per Unit
GH¢9 GH¢14 GH¢19
Contribution
Margin per Unit
GH¢6 GH¢7 GH¢17
23/08/2023 Kwame Oduro Amoako (PhD)
41. Solution cont’d
Step 2
Calculate the weighted-average contribution margin per unit for
the sales mix using the following formula:
• Product A CM per Unit × Product A Sales Mix Percentage
+ Product B CM per Unit × Product B Sales Mix Percentage
+ Product C CM per Unit × Product C Sales Mix Percentage
= Weighted Average Unit Contribution Margin
23/08/2023 Kwame Oduro Amoako (PhD)
42. Solution cont’d: Step 2
Product A B C
Sales Price per Unit GH¢15 GH¢21 GH¢36
− Variable Cost per Unit GH¢9 GH¢14 GH¢19
Contribution Margin per Unit GH¢6 GH¢7 GH¢17
× Sales Mix Percentage 20% 20% 60%
Weighted contribution per
unit
GH¢1.2 GH¢1.4 GH¢10.2
Sum: Weighted Average CM
per Unit
GH¢12.80
23/08/2023 Kwame Oduro Amoako (PhD)
43. step 3: Calculate total units of sales mix required to break-even using
the formula:
Break-even Point in Units of Sales Mix = Total Fixed Cost ÷ Weighted
Average CM per Unit
Total Fixed Cost GH¢40,000
÷ Weighted Average CM
per Unit
GH¢12.80
Break-even Point in Units
of Sales Mix
3,125
23/08/2023 Kwame Oduro Amoako (PhD)
44. Step 4: Calculate the number units of product A, B
and C at break-even point:
Product A B C
Sales Mix Ratio 20% 20% 60%
× Total Break-even Units 3,125 3,125 3,125
Product Units at Break-
even Point
625 625 1,875
23/08/2023 Kwame Oduro Amoako (PhD)
45. Step 5: Calculate Break-even Point in dollars as follows:
Product A B C
Product Units at
Break-even Point
625 625 1,875
× Price per Unit GH¢15 GH¢21 GH¢36
Product Sales in
Dollars
GH¢9,375 GH¢13,125 GH¢67,500
Sum: Break-even
Point in Dollars
GH¢90,000
23/08/2023 Kwame Oduro Amoako (PhD)
46. Self test in class
23/08/2023 Kwame Oduro Amoako (PhD)
47. Self test: Solution
Weighted average selling price:
= (GH¢200 × 20%) + (GH¢100 × 30%) + (GH¢50 × 50%)
= GH¢40 + GH¢30 + GH¢25
= GH¢95
Weighted average variable expenses:
= (GH¢100 × 20%) + (GH¢75 × 30%) + (GH¢25 × 50%)
= GH¢20 + 22.50 + 12.50
= GH¢55
The company will have to sell 1,250 units to break-even. Now I would
compute the number of units of each product to be sold:
Product X (1,250 × 20%): 250 units
Product Y (1,250 × 30%): 375 units
Product Z (1,250 × 50%): 625 units
Total: 250 units + 375 units + 625 units = 1,250 units
23/08/2023 Kwame Oduro Amoako (PhD)
50. • As the number of units of each individual product to
be sold have been computed, I can compute the
break-even point in dollars as follows:
• Product X (250 units x 200) 50,000
• Product Y (375 units x 100) 37,500
• Product Z (625 units x 50) 31,250
• Break even point in cedis 118,750
23/08/2023 Kwame Oduro Amoako (PhD)
Editor's Notes
Activity Step 3 Identify key variables in the breakeven equation.
Identify the lines on the graph.
The purple line represents revenue. Revenue when zero units are sold is zero dollars.
Activity Step 3 Identify key variables in the breakeven equation. (cont’d)
Identify the lines on the graph.
The blue line represents fixed cost. FC, by definition, remains the same regardless of number of units sold
Activity Step 3 Identify key variables in the breakeven equation. (cont’d)
Identify the lines on the graph.
The green line represents total cost, which is the sum of VC and FC.
Activity Step 3 Identify key variables in the breakeven equation.
Identify the lines on the graph.
The Point at which Total Cost and Revenue intersect (are equal) is the point at which profit = zero