aat level 3 break even analysis. objectives 1) define the term ‘break-even analysis’; 2)...
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AAT Level 3Break Even Analysis
Objectives1) Define the term ‘Break-even analysis’; 2) Calculate the contribution per unit, break-even point, total cost and profit/ (loss) using the calculation and table methods. 3) Interpret Break-even charts and use these charts to calculate the break-even point; margin of safety; profit/ (loss) at different production levels 4) Calculate target profit required 5) Use the profit volume ratio to calculate sales revenues at the break-even point 6) Analyse profit-volume charts 7) Describe the advantages and disadvantages of using Break-even analysis 8) Discuss when break-even is used
£Direct Materials X+ Direct Labour
X+Direct Expenses X+ Production OH *
XAbsorption Cost
X
£Direct Materials X+ Direct Labour
X+Direct Expenses X+ Production OH
XMarginal Cost X
* Remember that Overheads are absorbed
throughout the period using the OAR
Marginal CostIS
Variable Cost
Absorption Costing Marginal Costing
Chocolate!!!
Example – Manufacturing chocolates
500 units had total variable costs of £1500
Selling price is £6 each = £3000
Fixed costs are £700
£Direct Materials 1000+ Direct Labour 350+Direct Expenses 150Marginal Cost 1500Remember that MC is VC!
£Selling price3000Les Variable Costs1500Contribution1500Fixed Costs 700Profit 800
Break Even Where total costs = Total Sales
BE in Units = Fixed CostsContribution
BE in Value =Break Even Point (units) x Selling Price Per Unit
Activity 1 - Carl WrightCarl Wright, a market trader, makes and then sells his surfers neckwear for £19 each. The Variable Cost of producing each item is £14. This is also the Marginal Cost. Carl also has Fixed Costs of £200 a week for his sales pitch at an indoor market. Calculate the contribution per unit and the break even point.
Calculate the contribution per unit
Selling Price per unit £19Variable Cost per unit £14Contribution per unit £5
Calculate the Break Even Point
Total Fixed CostsContribution per unit
£200 = 40 units £5
Break even point in units = 40 Break Even in £ = 40 x £19 = £760
Activity 2 – Norfolk Press
Activity 2
Now try Activity 3
Margin of Safety
Either:Actual Output – Break Even Point
Or:
Margin of Safety (output) X 100Output produced
As a %
In units
Activity 4a) If Carl produced 70 units his margin of safety (MOS) would be:
MOS = Actual Output – Break Even Point
BE point (from Activity 1) = 40 units
Output = 70 units
70 – 40 = 30 units
Margin of Safety = 30 units
b) If Carl produced 55 units his margin of safety would be:
= Actual Output – Break Even Point
BE point (from page 4) = 40Output = 55
50 – 40 = 15
Margin of Safety = 15 units
c) If Carl produced 60 units his margin of safety as a percentage would be: = Actual Output – Break Even Point
BE point (from page 4) = 40Output = 60
60 – 40 = 20
Margin of Safety = 20 units
Margin of Safety (output) X 100%Output
= 20 x 10060
= 33%
d) At an output of 70 units Carls percentage MOS would be:
= Actual Output – Break Even Point
BE point = 40Output = 70
70 – 40 = 30
Margin of Safety = 30 units
Margin of Safety (output) X 100%Output
= 30 x 10070
= 42.9%
Break Even ChartsX axis is sales in units
Y axis is costs in £
Using the information Carl Wright produce a breakeven chart
It should have a key, axis labels and an appropriate heading
Break even can also be calculated using a chart
Break Even Chart
Ian Taylor
Hand-out
Your turn!Complete activities 6 & 7
Selling Price per unit 19Variable Costs per unit 14Contribution per unit 5
Total Contribution (80 x 5) £400Less fixed costs £200Profit £200
Targeted/Expected Profit
= Total Fixed Costs + Expected ProfitContribution per Unit
Carl Wright (Activity 1) (Requires £200 profit)
= 200 (FC) + 200 (EP) = 80 units 5
Activities 8 - 12
Activity 13 – Batman & Robin
1,000,000
2.50
480,000
400,000
Selling Price per unit
Sales Revenue ÷ Budgeted Units5000000 ÷ 500000 = £10
Unit Contribution
= Selling Price – Variable Costs
Variable Costs per unit1,000,000+1,250,000+1,500,000 = 3,750,000Per unit = 3750000 ÷ 500000 = £7.50
Unit Contribution
= Selling Price – Variable Costs
= £10 - £7.50 = £2.50
Break even (units)= Fixed Costs ÷ Contribution per unit= 1,000,000 ÷ 2.50= 400,000 units
Question 12 – Batman & Robin
1,000,000
2.50
480,000
400,000
80,000
Margin of Safety= Output – Break even output
=480000 – 400000 = 80,000 units
Margin of Safety as a %= MOS ÷ Output x 100= 80,000 ÷ 480,000 x 100= 16.67%
16.67
Complete Robin
Profit Volume Ratio
£ Contribution per Unit x 100£Selling Price per Unit
Shows contribution per £ of sales
(%)
Can be converted to a decimal
Profit Volume Ratio
Break even point £ = Fixed CostProfit Volume Ratio
Calculated on previous slide
Can also be used for target
profit(just add
targeted profit to the top line)
Question 13: Using the PV ratio, what is the sales revenue required to break-even? • Contribution per unit £25 • Selling price per unit £32 • Fixed costs £1100
£ contribution per unit x 100£ selling price per unit
= 25 X 100 32
= 78.13% or (0.78 as a decimal)
Sales Required to Break Even
= £ Fixed costsPVR (decimal)
= 1100 = £14100.78
Practice Activities 14 - 17
Activities 16-17Will require some applied
thinking!
Profit-Volume Charts
Activity 19
b) £13,000
a) 2500 units