break even analysis
DESCRIPTION
CIMA-Professional Gateway-P2TRANSCRIPT
PERFORMANCE
MANAGEMENT
Session2-Break even Analysis
Topics Covered
Cost-Volume Profit Analysis
Contribution
Break even point
Margin of safety
Break even chart
Cost Volume Profit Analysis-CVP
Effect on future profit due to changes in fixed cost, variable cost, sale price ,
quantity and mix.
Assumptions:
Sales price per unit is constant.
Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.
Contribution
Contribution =Sales value- variable cost
Contribution to sales ratio-C/S Ratio (P/V ratio)
=Contribution
Sales
Break Even Point
The break-even point represents the level of sales where net income equals
zero. In other words, the point where sales revenue equals total variable costs
plus total fixed costs, and contribution margin equals fixed costs.
Break even point in units
= Fixed Cost
Contribution per unit
Break even point in sales value
= Fixed Cost
Contribution ratio
Other ways to calculate the BEP:
Break even in sales value
=Variable cost (percentage)+ fixed cost
Margin Of Safety
A point above which profit will be made.
Margin of safety
=Budgeted sales-breakeven sales
Percentage Margin of safety
= Budgeted sales-breakeven sales
Projected sales
Way to calculate profit:
Margin of safety x contribution per unit
Calculation of sales to achieve certain
profit
Sales in units
=Fixed cost + Desired Profit
Contribution per unit
Sales in value
=Fixed cost + Desired Profit
C/S Ratio
Page # 102-125
Break Even Chart
Axis Y- Cost and revenue
Axis X-Level of activity
Break even point- where total cost and sales revenue meets.
Fixed cost will be shown as separate line.
Break even chart
Contribution Break Even Chart
Axis Y- Cost and revenue
Axis X-Level of activity
Break even point- where total cost and sales revenue meets.
Variable cost will be shown as separate line.
• Difference between sales line and variable cost line is contribution.
Profit Volume Chart
Single line for profit and loss of each activity.
Axis Y-Profit and losses.
Axis X-Zero Profit or loss
Page # 106
PV Chart
Multi product Break Even Analysis
Assumptions: sales mix remain constant.
Calculation of weighted average C/S ratio
=Total Contribution
Total Revenue
Calculation of Break even revenue:
=Fixed Cost
Weighted average C/S ratio
Multi product PV Graph
• Step1- Calculation of C/S ratio of each product.
• Step2-Axis X- Cumulative Sales
• Step3- Drawing of contribution per unit on product in order of profitability.
• Page #114-127
Sensitivity Analysis
• It determines the effects of various changes in the CVP model.
• The impact on revenue if variable cost changes, if product mix changes etc.
• Page #117
Advantages of break even analysis
It indicates the lowest amount of activity necessary to prevent loss.
Helps in decision making.
Explains the relationship between cost-production volume and returns.
Limitation of break even analysis
CVP analysis is based on assumptions about behavior of
Revenue, cost and volume. Change in behavior will later the break even point.
CVP chart also get impacted by assumptions.
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