Break Even Analysis-MBA

Prof.R.Chandrasekhar Ph.D

Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis


Variable Costs

Fixed Costs

Common Cost Behavior Patterns

Common Cost Behavior Patterns


Variable CostsVariable Costs

Costs that change in proportion to changes in volume or activity

At restaurants, food costs vary with the number of customers served

For airlines, fuel costs vary with the number of miles flown

Example Activity increases by 10% Cost increases by 10%


Fixed CostsFixed Costs

Do not change in response to changes in activity level Typical fixed costs are depreciation,

supervisory salaries, and building maintentance

Example Activity increases by 10% Costs remain unchanged


Fixed CostsFixed Costs


Mixed CostsMixed Costs



Equation Abbreviations

x = Quantity of units produced and sold

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



The Profit Equation

Profit = SP(x) – VC(x) – TFC

Fundamental to CVP analysis



Break-Even Point Number of units sold that allow the

company to neither a profit nor a loss

$0 = SP(x) – VC(x) – TFC

Margin of Safety Difference between expected sales

and break-even sales


Break-Even PointBreak-Even Point



Contribution Margin (CM) Difference between selling price

and variable cost per unit

Profit = (SP – VC)(x) – TFC

OR

Profit = CM per unit(x) - TFC



Contribution Margin Ratio Contribution of every sales dollar to

covering fixed cost

CM Ratio = SP – VC SP

Profit Equation (utilizing CM Ratio)

Sales($) = Profit + TFC CM Ratio



“What If” Analysis Utilize profit equation to determine

impact of managerial decisions

Change in Fixed and Variable Costs

Change in Selling Price


Gabby’s Wedding Cakes creates elaborate wedding cakes. Each cake sells for $500. The variable cost of baking the cakes is $200 and the fixed cost per month is $6,000

1. Calculate the break-even point for a month.

2. How many cakes must be sold to earn a monthly profit of $9,000?


Break-Even Pointx = (Profit + TFC) / CM per Unitx = ($0 + $6,000) / $300x = 20 cakes

What if monthly profit is $9,000?x = ($9,000 + $6,000) / $300x = 50 cakes


Assumptions in CVP Analysis

Assumptions in CVP Analysis

Costs can be accurately separated into fixed and variable components

Fixed costs remain fixed

Variable costs per unit do not change


Rhetorix, Inc. produces stereo speakers. The selling price per pair of speakers is $800. The variable cost of production is $300 and the fixed cost per month is $50,000.

1. Calculate the contribution margin associated with a pair of speakers.

2. Calculate the contribution margin ratio for Rhetorix associated with a pair of speakers.


Contribution MarginCM = SP – VCCM = $800 - $300CM = $500

If the company sells five more speakers than planned, what is the expected effect on profit of selling the additional speakers?Expected Effect = $500 * 5 units = $2,500


Contribution Margin RatioCM Ratio = (SP – VC)/SP = ($800 - $300)/$800

= 62.5%

If the company has sales that are $5,000 higher than expected, what is the expected effect on profit?Expected Effect = 62.5% * $5,000 = $3,125


1. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution Margin per unit is?a. $65b. $75c. $175d. $30


1. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution margin per unit is?a. $65b. $75c. $175d. $30


2. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?

a. 1,000 units

b. 1,083 units

c. 2,000 units

d. None of these


2. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?

a. 1,000 units

b. 1,083 units

c. 2,000 units

d. None of these


3. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?a. $264,000b. $384,000c. $143,000d. $121,000


3. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?a. $264,000b. $384,000c. $143,000d. $121,000


4. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?

Answer here: _________________


4. At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?

Answer here: $143,000

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Break Even Analysis-MBA