Breakeven (or CVP) Analysis

prepared by William Armah for warmah.com

Break-even point BEP is the amount of sales {either sales units (i.e. the quantity of sales) or the sales revenue} that an organisation must achieve to make zero profit or loss.
Sales quantity Sales volume

SP VC FC = Profit / loss SP VC = Contribution = Profit / loss + FC

prepared by William Armah for warmah.com 2

Breakeven point (BEP) in quantity (i.e. The quantity to sell to make an expected profit) =
(expected profit + total fixed cost) / Contribution per unit

Breakeven point (BEP) in revenue (i.e. The sales revenue to make an expected profit) =
(expected profit + total fixed cost) Contribution on sales* (C/S) ratio

prepared by William Armah for warmah.com

*C/S RATIO (for a single product) = Contribution per unit / Selling price per unit

*C/S RATIO (for more than product) = Total Contribution / Total Sales revenue

prepared by William Armah for warmah.com

Margin of safety = Budgeted sales Breakeven point (BEP)

The margin of safety results can be expressed as a percentage of either the budgeted sales or the breakeven point.

Margin of safety (as a percentage of budgeted sales)= {Budgeted sales Breakeven point) / Budgeted sales } x 100 Margin of safety (as a percentage of breakeven point)= {Budgeted sales Breakeven point) / Breakeven point} x 100

prepared by William Armah for warmah.com

The labelling of the Y-axis for each of the CVP charts is as follows:

Breakeven chart

Total sales revenue (TR) Total Cost (TC) Total Fixed Cost (FC)

Contribution chart

Total sales revenue (TR) Total Cost (TC) Total Variable Cost (VC)

Profit volume chart

Profit Loss

prepared by William Armah for warmah.com

TR Total revenue (TR)

Total cost (TC)

Total fixed cost (FC) BEP

TC

Margin of safely

FC

Level of activity

prepared by William Armah for warmah.com

Profit

Profit

Loss

Total FC

Loss

prepared by William Armah for warmah.com

Breakeven analysis is a useful technique for managers since it can provide managers with simple and quick estimates.

It is also useful for: Planning Decision-making Controls Motivation of employees

prepared by William Armah for warmah.com

It can only apply to single product or single mix of a group of products. A breakeven chart may be time consuming to prepare It assumes fixed costs are constant at all levels of output It assumes that variable costs are the same per unit at all levels of output It assumes that sales prices are constant at all levels of output It assumes production and sales are the same (stock levels are ignored) It ignores the uncertainty in the estimates of fixed costs and variable cost per unit.
prepared by William Armah for warmah.com 10

Thank you for using our resources and website materials.

Recommend www.warmah.com to a friend. All the best in your studies We provide mentoring service, directed learning, lecture materials, management consultancy ...
Contact: info@warmah.com

Tel: +44 (0)7903960287

prepared by William Armah for warmah.com

11