BEA Problems

BREAK EVEN
ACCOUNTING
Break Even
Contribution per Unit Selling Price (pu) – Variable Costs (pu)

C = (SP-VC)
Total Costs Variable Costs + Fixed Costs

TC = (VC + FC)
Break Even Point (units) Fixed Costs

(this is where a firm makes neither a Contribution (pu)
profit nor a loss) BEP = (FC)
C
Break Even Point (Sales Revenue) Break Even Point (units) * Selling Price
BEP = (BEP * SP)
Total Contribution Estimated Sales * Contribution (pu)

TC = (ES * C)
Margin of Safety (units) Estimated Sales (units) – Break Even Point

(this is the number of units greater (units)
than the BEP – it’s where a firm MOS = (ES – BEP)
makes a profit)
Margin of Safety (Sales Revenue) Margin of Safety (units) * Selling Price (pu)
MOS = (MOS * SP)
No of units to be sold for desired Fixed Costs + Desired Profit

profit Contribution (pu)
= (FC + DP)
C
Profit at estimated sales Margin of Safety (units) * Contribution (pu)

= (MOS * C)
1
BREAK EVEN ANALYSIS
Jack Jones is starting a business and will have to consider all costs. Jack has decided to manufacture
and sell leather jackets. He will first consider what is called the Variable Costs of producing the
jackets - ie the essential materials and labour required.
VARIABLE COSTS - MATERIALS AND LABOUR
1. aLeather
2. Buttons
3. Lining Material
4. Thread, etc
5. Direct Labour. This is the wage costs of any worker involved in the manufacture of the leather
jackets and is also treated as a Variable Cost, but NOT salaries of supervisors, management, etc
as they oversee production but do not have any part in the process of making the jackets.
Variable Costs are said to vary with production. This means the more jackets you manufacture the
higher your variable costs should be. Therefore costs such as leather, labour, etc will increase if
production increases, but should also decrease when production falls.
EXERCISE 1
The following costs have been estimated for the manufacture of a leather jacket.
Material Cost per unit – eg leather, buttons, thread, etc £40
Labour Cost per unit – cutters, machinists, etc £20
Complete the table below showing material and labour costs at different levels of output/production
VARIABLE OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40
COSTS UNITS UNITS UNITS UNITS
Material Cost
Labour Cost
TOTAL
VARIABLE
COSTS
It is clear to see from the table above that the more units we produce, the higher the variable costs
become.
EXERCISE 2
The following costs have been estimated for the manufacture of leather belts.
Material Cost per unit £3
Labour Cost per unit £1
Other Variable Overheads per unit £0.50
VARIABLE OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40

COSTS UNITS UNITS UNITS UNITS
Material Cost
Labour Cost
Variable
O’heads
2
TOTAL
VARIABLE
COSTS
* The higher the level of output – the more we have to pay in Variable Costs
In addition to considering Variable Costs, Jack will also take into account his Fixed Costs.
FIXED COSTS/OVERHEADS
These costs remain the same no matter what happens to production levels. If output/production is
high, Fixed Costs remain the same, if output/production is low, Fixed Costs remain the same.
Examples of fixed costs are:
 Rent
 Wages of Assistant working in shop
 Insurance
 Electricity
 Gas
If your landlord is charging £500 each month for Rent, then he will continue to charge you £500 each
month. It does not matter to him if you are producing 200 leather jackets or 2 leather jackets - you are
simply renting premises from him.
EXERCISE 3
Complete the table below showing Fixed Costs at different levels of output/production
FIXED COSTS OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40
UNITS UNITS UNITS UNITS
Rent £500
Wages of Assistant
£400
Insurance £40
Electricity £60
It is clear to see from the table above that fixed costs do not vary with changes in production
EXERCISE 4
You have started a new business making designer greetings cards. A small outlet has been rented by
you and you will be expected to pay all the usual costs – rent, electricity, gas, etc.
You have also employed 2 members of staff who will receive wages from you – one will help you to
make the cards (Manufacturing Wages) the other will serve customers (Shop Assistant Wages).
To make the cards will require materials such as, card, ribbon, glitter, etc.
From the information given above, plus any other expenses that you can think of, list the expenses
under the following headings:
3
VARIABLE COSTS FIXED COSTS
VARIABLE COSTS AND FIXED COSTS
Complete the table below showing Variable Costs, Fixed Costs and Total Costs at different levels of
output/production
NOTE: VARIABLE COSTS + FIXED COSTS = TOTAL

COSTS
EXERCISE 5
Duncan Jones sells roller blades to a local sports shop. Duncan estimates the following costs:
Labour = £5 per unit
Materials = £10 per unit
Fixed Costs = £5,000
UNITS VARIABLE COSTS FIXED COSTS TOTAL COSTS

0
10
20
30
40
4
50
60
70
SALES REVENUE – THE AMOUNT OF MONEY WE RECEIVE BY SELLING OUR

OUTPUT/MANUFACTURE
Sales Revenue or Sales = (No of units sold) x (Selling Price per unit)
EXAMPLE – IF WE PRODUCE 200 UNITS AND ARE PAID £5 PER UNIT:
SALES REVENUE = (200 X £5) = £1,000
EXERCISE 6
Eric Cooper makes ceramics for a local gift shop which he sells for £50 each. Eric estimates the
following costs:
Labour = £10 per unit
Materials = £20 per unit
Fixed Costs = £3,000
Complete the following table:
UNITS VARIABLE FIXED TOTAL SALES PROFIT/LOSS

COSTS COSTS COSTS REVENUE
0
30
60
90
120
150
180
210
BREAK-EVEN POINT – THIS IS WHERE A FIRM MAKES NEITHER A PROFIT NOR A LOSS
– THEY SIMPLY MAKE ENOUGH SALES REVENUE TO COVER TOTAL COSTS.
The Break Even Point in the table above is .................... units with Sales Revenue of £..........................
5
CONTRIBUTION
This is the name given to the Selling Price (per unit) – Variable Cost (per unit).
This money contributes to covering Fixed Costs.
EXAMPLE
A firm provides the following estimates:
Per unit
Selling Price £60

Materials £8
Labour £12
To calculate the Contribution per unit:
Selling Price (per unit) – Variable Cost (per unit)
£60 - (8+12) = £40
If we now learn that Fixed Costs for the year are estimated to be £4,000 – how many units must be
sold so that this firm simply Breaks-Even – makes no profit but brings in enough Sales Revenue to
cover its Fixed Costs.
Break Even Point = FIXED COSTS

CONTRIBUTION
= £4,000
40
= 100 UNITS
Sales Revenue at BEP

= (BEP Units x Selling Price)
= (100 x £60)
= £6,000
EXERCISE 7
Calculate the Break-Even point in units and sales revenue from the information given below:
Total Fixed Costs £4,000

Variable Costs per unit £15
Selling price per unit £25
EXERCISE 8
Calculate the Break-Even point in units and sales revenue from the information given below:
Variable Costs per unit £12
6
TO CALCULATE TOTAL CONTRIBUTION
= CONTRIBUTION PER UNIT X UNITS SOLD
In the following exercises you are required to calculate:

1. Contribution per Unit
2. Break-Even point – in units and sales revenue
3. Total Contribution
EXERCISE 9
Variable Costs per unit:
Materials £10
Labour £15
Selling Price £40
Output 5,000 units
EXERCISE 10
Variable Costs per unit:
Materials £12
Labour £10
Selling Price £30
Output 7,000 units
TO CALCULATE PROFIT/LOSS
= TOTAL CONTRIBUTION – FIXED COSTS
In the following exercises you are required to calculate:
1. Contribution per Unit

2. Break-Even point – in units and sales value
3. Total Contribution
4. Profit/Loss
EXERCISE 11
Selling Price per unit £30
Variable Cost per unit £20
Fixed Costs £100,000
Output 15,000 units
EXERCISE 12
Output 10,000 units
7
EXERCISE 13
Output 4,000 units
EXERCISE 14
Output 6,500 units
EXERCISE 15
Three firms have supplied the following information:
A ANDERSON B BENSON C CAMERON
Variable costs per unit £3.00 £4.50 £6.80
Selling price per unit £6.00 £8.50 £11.80
Fixed Costs £4,500 £6,400 £17,500
Output 3,000 units 4,000 units 5,000 units
1. Calculate the contribution per unit for each firm
2. For each firm find the break-even point in units of output
3. For each firm find the sales revenue at break even point
4. Calculate the total contribution at the different levels of output for each firm
5. Calculate the profit/loss for each firm
EXERCISE 16
JACKSON HENDERSON LYLE
Fixed Costs £10,000 £8,000 £12,000
EXERCISE 17
LEE DARGAN BURNS
Fixed Costs £12,000 £24,000 £35,000
8
EXERCISE 18
Novelties plc assembles novel clocks and has estimated the following figures for a new style:
£
Selling price per unit 34
Variable costs per unit:
Component parts 12
Wages 6
You are required to calculate:

1. The contribution per clock
2. The break-even point in units of output
3. The sales revenue of these units
4. If the cost of the component parts is increased to £14, what is the new contribution per unit?
5. Find the new break-even point in units and in sales revenue
EXERCISE 19
The following data has been supplied by D Denver, who is considering manufacturing a new style of
shirt:
£
Selling price per unit 21.00
Variable costs per unit:
Materials 6.50
Wages 4.50
1. Calculate the contribution per shirt
2. Find the break-even point in unit of output and sales revenue
3. What is the new contribution per shirt if they could be sold at £22 each?
4. Calculate the new break-even point in units at the increased selling price
5. What is the sales revenue of these units?
9
MARGIN OF SAFETY (MOS)
This is the number of units sold above the Break Even point eg if the Break Even point is 400 units
and we manage to sell 700 units then the Margin of Safety = (700 units – 400 units) = 300 units. This
means that the first 400 units sold covers our Fixed Costs and the remaining 300 units are now profit
earned by the Company.
TO CALCULATE MARGIN OF SAFETY IN UNITS
ESTIMATED SALES – BREAK EVEN POINT
TO CALCULATE MARGIN OF SAFETY IN SALES VALUE
MARGIN OF SAFETY IN UNITS X SELLING PRICE PER UNIT
TO CALCULATE PROFIT ON MARGIN OF SAFETY
MARGIN OF SAFETY IN UNITS X CONTRIBUTION PER UNIT
EXAMPLE
The following data is available for John Smith.

Contribution per unit £10
Break Even point 300 units
Estimated Sales 500 units
Calculate:
1. Margin of Safety in units
2. Margin of Safety in Sales revenue
3. Profit at estimated Sales of 500 units
10
EXERCISE 20
The following data is available for Alec Brown.

Break Even point 500 units
Estimated Sales 900 units
Calculate:

3. Profit at estimated Sales of 900 units
EXERCISE 21
The following data is available for Susan Jackson.

Break Even point 1,000 units
Estimated Sales 1,500 units
Calculate:

3. Profit at estimated Sales of 1,500 units
EXERCISE 22
Alert plc installs burglar alarm systems and expects to install 400 units of System A in the next year.
Costs are estimated as follows:
£
Total fixed costs £81,400
Variable costs per unit £480
1. Calculate the contribution per unit

2. Find the break-even point in units
3. Find the sales revenue of these units
4. What is the margin of safety in units and sales revenue?
11
EXERCISE 23
Downies plc makes quilts and has budgeted the following figures for an output of 20,000 units:
£
1. Calculate the contribution per quilt

2. Find the break-even point in units and sales revenue
3. What is the margin of safety in units and sales revenue?
4. If fixed costs were decreased to £179,800 what would be the new break-even point in units and
sales revenue?
EXERCISE 24
J Jones has supplied the following figures:
£
Variable costs per unit
Materials £36
Wages £15
Variable Expenses £3
1. How much is the contribution per unit?

2. Find the break-even point in units
3. What would be the sales revenue of these units?
4. Calculate the profit at output levels of 3,000 and 4,000 units
EXERCISE 25
Outdoor Relaxing plc produces loungers and hopes to sell 1,000 in the coming year. The following
figures are forecast:
£
1. Calculate the contribution per unit

3. Calculate the profit at output levels of 640 and 720 units
NO OF UNITS REQUIRED TO MAKE A PARTICULAR PROFIT
PROFIT REQUIRED + FIXED COSTS

CONTRIBUTION PER UNIT
12
EXERCISE 26
N Nelson provides you with the following information:
£
You are required to calculate the following:

1. Contribution per unit
2. Break-even point in units and sales revenue
3. No of units which require to be sold to make a profit of £15,000
EXERCISE 27
M Andrews provides you with the following information:
£

EXERCISE 28
C Montague provides you with the following information:
£

EXERCISE 29
A leather company produces briefcases and has provided the following data:
£
Total Fixed Costs 19,800
Variable Costs per Unit
Materials 30
Fastenings and locks 12
Wages 25
Selling price per unit 139
13
You are required to find the following

2. Break-even point in units and in sales revenue
3. Profit at output levels of 300 and 400 units
4. The output level required to give a profit of £7,920
EXERCISE 30
The following figures relate to ornamental trees supplied by nurserymen J & M Dawson, who have
fixed costs of £6,480:
£
Selling price per tree 36
Variable costs per tree 20
1. Find the contribution per unit

3. How many trees would need to be sold in order to achieve the following profit levels: £1,360 and
£5,040
4. How much is the profit at output levels of 450 and 580 units?
EXERCISE 31
Soundsleep plc produces beds which sell at £580 each. The following details of costs have been
supplied:
£
Variable Costs per Unit
Materials 80
Component parts 120
Wages 100
Total fixed costs 686,000
1. Find the contribution per unit

2. Find the break-even point in units and in sales revenue
3. How many beds would need to be sold in order to achieve the following profit levels: £16,800 and
£64,400?
4. How much is the profit at output of 5,000 units?
EXERCISE 32
Sheila’s Fitboards make and sell skateboards. Production is limited to 400 skateboards.
The following information is available for Year 3:

Variable cost per unit £20
Fixed costs £4,600
(a) Using the information above calculate:
(i) Contribution per unit

(ii) Break-even point in units
14
(iii) Break-even point in sales revenue
(iv) Profit or loss at an output of 300 units
(v) Total maximum profit
(b) Describe the following terms:
(i) Fixed cost

(ii) Variable cost
(c) The following costs are either fixed or variable. Place a tick in the correct box.
Cost Fixed cost Variable

cost
i Production Wages
ii Stationery
iii Management Salaries
iv Raw Materials
v Insurance
EXERCISE 33
Patrick’s Skates make and sell ice skates. Production is limited to 500 units.

Fixed costs £4,000

(iii) Fixed cost

(iv) Variable cost

cost
i Production Wages
ii Rent
iii Salaries
iv Raw Materials
v Buildings Insurance
15
EXERCISE 34
Jackson Communications make and sell mobile phones. Production is limited to 600 units.

Fixed costs £6,600

(v) Fixed cost

(vi) Variable cost

cost
i Manager’s Salaries
ii Stationery
iii Raw Materials
iv Production Wages
v Power
EXERCISE 35
Kev plc makes and sells calculators. Production is limited to 1000 units.

Fixed costs £4,000

(vii) Fixed cost

(viii) Variable cost
16

cost
i Supplies for cafeteria
ii Raw Materials
iii Salaries
iv Power
v Production Wages
EXERCISE 36
John makes and sells action figures. Production is limited to 1,000 figures.

Fixed costs £5,000

(vi) Fixed cost

(vii) Variable cost

cost
i Production Wages
ii Buildings Insurance
iii Raw Materials
iv Power
v Direct Expenses
17
EXERCISE 37
Jessica Alan makes and sells ceramics. Production is limited to 800 units.

Fixed costs £16,000

(vi) Fixed cost

(vii) Variable cost

cost
i Manufacturing Wages
ii Stationery
iii Power
iv Cleaning Costs
v Direct Materials
EXT EXERCISE 1
K Kennedy provides you with the following information:
£

3. Margin of Safety in units and sales revenue at 1,200 units and 1,500 units
5. If estimated sales are expected to be 2,000 units, calculate the profit which would be made
EXT EXERCISE 2
J Joseph provides you with the following information:
18
£

EXT EXERCISE 3
A Jones provides you with the following information:
£

19
BREAK-EVEN CHARTS
Break-even charts show the following:
 Sales Revenue – this line always starts at 0
 Fixed Costs – as fixed costs do not vary with production – this is always represented by a flat
horizontal line
 Total Cost – line always starts at Fixed Costs
 Break even point in units and sales revenue – this is where the total fixed costs and sales revenue
lines intersect
 Margin of Safety – this is where the sales revenue is greater than total costs
TO CALCULATE SALES REVENUE
 Find a good point in the chart where it is easy to get an exact reading of Sales Revenue from the
chart – the Break-even point is usually a good place
 Divide the Sales Revenue at that point by the Output at that point to give you the Sales Revenue
per unit
TO CALCULATE VARIABLE COST PER UNIT
 NOTE: Variable Costs are not shown in a Break-even chart – but we are given Total Costs –
(Total Costs – Fixed Costs) = Variable Costs
 Find a good point in the chart where it is easy to get an exact reading of Total Costs from the
chart - the Break-even point is usually a good place
 Subtract Fixed Costs from the Total Cost and this gives us the Variable Costs
 Divide the Variable Costs at that point by the Output at that point to give us the Variable Cost per
unit
20

BEA Problems

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BREAK EVEN

Contribution per Unit Selling Price (pu) – Variable Costs (pu)

Total Costs Variable Costs + Fixed Costs

Break Even Point (units) Fixed Costs

Total Contribution Estimated Sales * Contribution (pu)

Margin of Safety (units) Estimated Sales (units) – Break Even Point

No of units to be sold for desired Fixed Costs + Desired Profit

Profit at estimated sales Margin of Safety (units) * Contribution (pu)

VARIABLE COSTS - MATERIALS AND LABOUR

VARIABLE OUTPUT – 10 OUTPUT – 20 OUTPUT – 30 OUTPUT – 40

VARIABLE COSTS AND FIXED COSTS

NOTE: VARIABLE COSTS + FIXED COSTS = TOTAL

UNITS VARIABLE COSTS FIXED COSTS TOTAL COSTS

SALES REVENUE – THE AMOUNT OF MONEY WE RECEIVE BY SELLING OUR

UNITS VARIABLE FIXED TOTAL SALES PROFIT/LOSS

This money contributes to covering Fixed Costs.

A firm provides the following estimates:

Selling Price £60

To calculate the Contribution per unit:

Selling Price (per unit) – Variable Cost (per unit)

£60 - (8+12) = £40

Break Even Point = FIXED COSTS

Sales Revenue at BEP

Total Fixed Costs £4,000

= CONTRIBUTION PER UNIT X UNITS SOLD

In the following exercises you are required to calculate:

= TOTAL CONTRIBUTION – FIXED COSTS

In the following exercises you are required to calculate:

1. Contribution per Unit

You are required to calculate:

ESTIMATED SALES – BREAK EVEN POINT

TO CALCULATE MARGIN OF SAFETY IN SALES VALUE

MARGIN OF SAFETY IN UNITS X SELLING PRICE PER UNIT

TO CALCULATE PROFIT ON MARGIN OF SAFETY

MARGIN OF SAFETY IN UNITS X CONTRIBUTION PER UNIT

The following data is available for John Smith.

The following data is available for Alec Brown.

Selling price per unit £50

1. Margin of Safety in units

The following data is available for Susan Jackson.

Selling price per unit £60

1. Margin of Safety in units

1. Calculate the contribution per unit

1. Calculate the contribution per quilt

J Jones has supplied the following figures:

1. How much is the contribution per unit?

1. Calculate the contribution per unit

NO OF UNITS REQUIRED TO MAKE A PARTICULAR PROFIT

PROFIT REQUIRED + FIXED COSTS

N Nelson provides you with the following information:

You are required to calculate the following:

M Andrews provides you with the following information:

You are required to calculate the following:

1. Contribution per unit

C Montague provides you with the following information:

You are required to calculate the following:

1. Contribution per unit

1. Contribution per unit

1. Find the contribution per unit

1. Find the contribution per unit

The following information is available for Year 3:

Selling price per unit £60

(a) Using the information above calculate:

(i) Contribution per unit