Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
55 views

Break Even Analysis and Managerial Decision Making: Barnali Chaklader

This document discusses break even analysis and its use in managerial decision making. It defines the profit equation and provides an example calculation of operating income for a lawn mower business. The break even point is calculated as the point where total revenue equals total costs. Assumptions of cost-volume-profit analysis are that expenses can be classified as fixed or variable, relationships are linear, and prices and costs do not vary. The document also provides formulas for calculating break even units and sales and discusses using targets profits to determine units needed and defines margin of safety.

Uploaded by

Ashwin Dalela
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
55 views

Break Even Analysis and Managerial Decision Making: Barnali Chaklader

This document discusses break even analysis and its use in managerial decision making. It defines the profit equation and provides an example calculation of operating income for a lawn mower business. The break even point is calculated as the point where total revenue equals total costs. Assumptions of cost-volume-profit analysis are that expenses can be classified as fixed or variable, relationships are linear, and prices and costs do not vary. The document also provides formulas for calculating break even units and sales and discusses using targets profits to determine units needed and defines margin of safety.

Uploaded by

Ashwin Dalela
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 12

Break Even Analysis and Managerial

Decision Making

Barnali Chaklader

05/09/2020
The Profit Equation

Profit = SP(x) –VC(x) – TFC

X = Quantity of units produced and sold


SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost

2
Operating income for lawn mower

Sales (1,000 units @ $400) $ 400,000


Less: Variable expenses (1000 units @$325) 325,000

Contribution margin $ 75,000


Less: Fixed expenses 45,000
Operating income $ 30,000

3
Break-Even Point
Break Even Point

Break-even:
0 = Sales revenue – Variable expenses –
Fixed expenses
0 = ($400 x Units) – ($325 x Units) - $45,000
($75 x Units) = $45,000
Units = 600

5
Check-up on break-even
Sales (600 units @ $400) $ 240,000

Less: Variable expenses( 600 x 325) 195,000

Contribution margin $ 45,000

Less: Fixed expenses 45,000

Operating income $ 0

6
Assumptions of CVP Analysis

• Expenses can be classified as either


variable or fixed.

• CVP relationships are linear over a wide


range of production and sales.

• Sales prices, unit variable cost, and total


fixed expenses will not vary within the
relevant range.

7
BREAK EVEN POINT (FORMULA)
 BEP (units) = Fixed Cost
Contribution/ unit

Where contribution/unit= Selling Price/unit-


Variable Cost/unit

Breakeven sales revenue =


Fixed costs / Contribution margin ratio
Contribution margin ratio = (Contribution/
Sales) *100

8
BEP
Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
Break Even sales= Fixed Cost/ Contribution Margin
ratio
CM ratio= ($400-$325)/$400*100 = 18.75%
BES= $45000/ 18.75%= $ 240000

9
If We want Target Profits
 Target profit in units:
 # Units = (Fixed cost + Target profit)/
 Unit contribution margin
 # Units = ($45,000 + $60,000) / ($400 - $325)
 # Units = 1,400

10
MARGIN OF SAFETY: Definition
 Is the difference between break-even volume or sales
and expected volume or sales

Example
If actual units= 15000 units and BEP= 14000 units
MOS = 1000 units

11
THANK YOU

05/09/2020

You might also like