Breakeven Analysis Lecture30 Main Ahmad Farhan Breakeven Analysis
Break-even Analysis Lecture-30 Main Ahmad Farhan
Break-even Analysis The Point of sales at which the entity earn no profit and sustain no loss.
Contribution Margin Ratio = Contribution margin / Sales x 100
Example Sales 700 units x Rs 8 Variable cost 700 units x Rs 8 Contribution margin Fixed cost Profit 5, 600 4, 200 1, 400 1, 000 400
Example Sales 700 units x Rs 8 Variable cost 700 units x Rs 8 Contribution margin Variable cost over sales 4200 / 5600 x 100 =75% Contribution margin over sales 1400 / 5600 x 100 = 25% 5, 600 4, 200 1, 400
Per Unit Reaction Sales price Less Variable cost Contribution Margin Rs 8 (6) 2 6 / 8 x 100 = 75% 2 / 8 x 100 = 25% Contribution margin per unit / Sales price Per unit x 100
Break even point refers to the volume (sales) at which the entity earns no profit and suffers no loss. Point at which Contribution margin = Fixed cost Target profit = 0
Contribution margin – Fixed cost = 0 Profit Contribution margin = Fixed cost + 0 Profit At break even point the target contribution is equal to the fixed cost
Contribution Margin – Fixed cost = Profit Contribution margin = Fixed cost + Profit
Example Sales 700 units x Rs 8 Variable cost 700 units x Rs 8 Contribution margin Fixed cost Profit Per Unit 8 6 2 Total Percentage 5, 600 4, 200 1, 400 1, 000 400 100% 75% 25%
Formula Given Amount In absolute terms x % of required amount % of given amount = Required amount
Target Contribution Margin Rs 1, 000 / 25 x 100 = Rs 4, 000 OR Rs 1, 000 x 1 /. 25 = 4, 000 OR Rs 1, 000 /. 25 = 4, 000
Break-even Sales B. E (s) = Fixed cost Contribution to sales ratio
Example Sales 500 units x Rs 8 Variable cost 500 units x Rs 6 Contribution margin Fixed cost Profit 4, 000 3, 000 1, 000 0
Unity Method Rs 8 sales / Rs 2 contribution margin x 100 Target Contribution margin = Break even sales Rs. 4, 000
Break-even in Quantity 4, 000 / 8 = 500 units Target CM / CM per unit Fixed Cost / CM per unit = Rs. 1, 000 / 2 = 500 units
Formulas Break even sales in Rupees = Target CM / Contribution to sales ratio Break even = Target CM / Contribution margin per unit
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