1、Break-Even and Cost-Volume-Profit AnalysisChapter 24Break-even AnalysisnDetermines at what level cost and revenue are in equilibriumnBreak-even pointObtained directly by mathematical calculationsUsually presented in graphic form known as break-even chartDetermining the Break-Even PointnEach expense

2、must be analyzed to determine its fixed and variable portionsnSemi-variable expenses must be separated into their fixed and variable componentsnFixed portion is stated as a total figurenVariable portion is stated as a rate or percentageDetermining the Break-Even PointnBreak-even analysis may be base

3、d onHistorical dataFuture sales and costsDetermining the Break-Even PointnContribution margin ratio (C/M ratio)Also known as marginal income ratio or Profit-volume ratioContribution of each dollar towards covering fixed costs and making a profitContribution margin ratio = 1 (Variable costs/Sales)OR

4、Contribution margin ratio = unit contribution margin/unit sales priceContribution margin= sales variable costsExamplenThe ABC Lodge has sales of $4500,000. The fixed expense was $1,200,000 and the variable expense totaled $1,800,000.nContribution margin rationContribution margin Income StatementnSal

5、esxxxnLess variable expensesxxxnTotal contribution marginxxxnLess fixed expensesxxxnProfitxxxDetermining the Break-Even PointBreak-even = Fixed costs sales volume ($) Contribution margin ratioBreak-even = Fixed costs sales volume ($) 1 (Variable costs/Sales)Determining the Break-Even PointBreak-even

6、 = Fixed costs sales in units Contribution margin/unitBreak-even = Break-even sales in dollars sales in units Unit sales priceExamplenThe ABC Lodge has sales of $4500,000. The fixed expense was $1,200,000 and the variable expense totaled $1,800,000.nBreak even point in dollarsEquation ApproachnProfi

7、t= Sales revenue-variable expenses-fixed expensesnProfit= (Unit sales price)*(sales volume)- (unit variable expenses)*(sales volume)-(Fixed expenses)Determining the Break-Even PointBreak-even capacity %age = Break-even sales in dollars Normal sales volume in dollarsMargin of Safety ratio =Sales Brea

8、k-even sales SalesProfit % = CM ratio x Margin of safety ratioBreak even ChartBreak even ChartnChanges in Fixed expensesn Original estimatenew estimatenFixed utilities expenses$1,400 $2,600nTotal Fixed expenses48,000 49,200nBreakeven calculation 48,000 49,200n(FC/unit contribution margin) $6 $6nBrea

9、k even point(units)8,000units 8,200 unitsnBreak even point (dollars)$128,000 $131,200Break even ChartnChange in unit variable expensesnIncrease in unit variable expenses will cause a decrease in unit contribution margin. nBreak even will now be achieved at a higher output level. Break even ChartnCha

10、nge in sales pricenIncrease in sales price will cause an increase in unit contribution margin.nBreak even will now be achieved at a lower output level. nHowever, careful analysis by the management is required as the increase in sales price might also cause a decline in output sold. Profit-Volume Ana

11、lysisTarget Net ProfitnWe can use break-even analysis to find the sales required to reach a target level of profit.nNumber of sales units required to earn target profit:n= Fixed expenses+ Target net profit Unit contribution marginExamplenCalculate the number of units the company needs to sell in order to realize a Profit of $500,000?nGiven:nFixed costs= $100,000nSale price= $10nVa