BE/CVP Analysis
Dept. of……………………………
RUET, Rajshahi
Chapter outline:
Introduction
Objectives,
Key terms in BEP/ CVP Analysis:
Sales Equation, Profit, Contribution Margin (CM) and Contribution Margin (CM)Ratio, Variable Cost Ratio, Break Even point,
Component of BEP, Computing BEP, Computing Target Profit, Break Even Chart, Margin of Safety (M/S) and Angle of
Incidence.
Chapter Outcome:
Using a Break-Even Analysis, you can answer questions like:
•What are the projected profits and losses at any given output level?
•At what minimum sales level do you avoid making a loss?
•Do your sales projections for a new product exceed break-even?
•If you drop a product, will your break-even improve?
•How will raising or lowering prices affect your profitability?
•If costs increase, what is the effect on your break-even position?
•How does investing in facility improvements affect your break-even point?
Introduction:
Cost-Volume-Profit Analysis (CVP analysis), also commonly referred to as Break-Even Analysis, is a way for companies to
determine how changes in costs (both variable and fixed) and sales volume affect a company’s profit. With this information,
companies can better understand overall performance by looking at how many units must be sold to break even or to reach a
certain profit threshold or the margin of safety. In business, your ultimate objective is to make money.
Prob. Sales 3000units @Tk 100 per unit, V= Tk 60 per unit, Total Fixed Cost= Tk60000.
1. Sales Equation: Sales = Total Cost+ Profit
Sales = Variable cost+ Fixed Cost + Profit, S=V+F+P, [100=60+30+10], S-V=F+P, CM=F+P
(Total Cost=V+F), (V=D.M + D.L.+ [Link].)
2. Profit= S-V-F, ( P= 3000*100-3000*60-60000= Tk. 60000), P= CM-F=3000*40-60000=60000, (4000*40-
60000=100000)
3. CM= S-V =100-60=Tk.40 per unit [Product A= CM= TK 50, Product B= CM=TK. 40]
[Link] Ratio= CM/S, CM Ratio= 40/100=0.4=40%, (V=S-CM) CM Ratio = Contribution Margin / Sales = CM/S
5. Variable Expense Ratio = Variable Costs / Sales = V/S= 60/100 =60%
A high CM ratio and a low variable expense ratio indicate low levels of variable costs incurred.
6. Break-Even Point: The break-even point (BEP), in units, is the number of products the company must sell to cover all
production costs. Similarly, the break-even point in dollars is the amount of sales the company must generate to cover all
production costs (variable and fixed costs).
The formula for break-even point (BEP) is:
BEP in Units =Total Fixed Costs / CM per Unit or BEP in Units= Total Fixed Cost/Sales per unit- Variable Cost per unit
The BEP, in units, would be equal to 240,000/15 = 16,000 units. Therefore, if the company sells 16,000 units, the profit will be
#3 Changes in Net Income (What-if Analysis)
It is quite common for companies to want to estimate how their net income will change with changes in sales
behavior. For example, companies can use sales performance targets or net income targets to determine
their effect on each other.
In this example, if management wants to earn a profit of at least $100,000, how many units must the
company sell?
We can apply the appropriate what-if formula below:
No. of units = (Fixed Costs + Target Profit) / CM Ratio
Therefore, to earn at least $100,000 in net income, the company must sell at least 22,666 units.
#4 Margin of Safety
In addition, companies may also want to calculate the margin of safety. This is commonly referred to as the
company’s “wiggle room” and shows by how much sales can drop and yet still break even.
The formula for the margin of safety is:
Margin of Safety = Actual Sales – Break-even Sales
The margin of safety in this example is:
Actual Sales – Break-even Sales = $1,200,000 – 16,000*$60 = $240,000
This margin can also be calculated as a percentage in relation to actual sales: 240,000/1,200,000 = 20%.
Therefore, sales can drop by $240,000, or 20%, and the company is still not losing any money
Prob. Sales 3000units @Tk 100 per unit, V= Tk 60 per unit, Total Fixed Cost= Tk60000.
Example of Break Even Analysis
Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously
determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries,
which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The
water bottle is sold at a premium price of $12. To determine the break even point of Company A’s premium
water bottle:
Break even quantity = $100,000 / ($12 – $2) = 10,000
Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would
need to sell 10,000 units of water bottles to break even.
The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or
revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to
the company. Total profit at the break-even point is zero. It is only possible for a firm to pass the break-
even point if the dollar value of sales is higher than the variable cost per unit. This means that the selling
price of the good must be higher than what the company paid for the good or its components for them to
cover the initial price they paid (variable and fixed costs). Once they surpass the break-even price, the
company can start making a profit.
Graphically Representing the Break Even Point
The graphical representation of unit sales and dollar sales needed to break even is referred to as the break
even chart or Cost Volume Profit (CVP) graph. Below is the CVP graph of the example above:
Prob. 1. The following data is obtained from the cost record of a company:
Sales 3000 units @ Tk. 100 per unit, variable costs Tk. 60 per unit and fixed Tk. 60000. Require
1. Calculate CM Ratio and Profit
2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 120000.
6. Calculate BEP if selling price is increased by 10%.
7. Calculate BEP if variable cost is increased by Tk. 10.
8. Show in chart BEP, M/S and Angle of incidence.
9. Calculate sales price if BEP is to be achieved at 1000 units.
10. Calculate BEP if margin of safety is increased 60%.
Prob. 2. The following data is obtained from the cost record of a company:
Sales Tk. 300000, variable costs Tk. 180000 and fixed Tk. 60000. Require
1. Calculate CM Ratio and Profit
2. Calculate BE sales volume.
3. Calculate Margin of Safety’
4. Calculate sales volume if the company earns amount of profit of Tk. 120000.
5. Calculate BEP if selling price is decreased by 10%.
6. Calculate BEP if variable cost is decreased by Tk. 10.
Break-even analysis is of vital importance in determining the practical application of cost functions. It is a function of three
factors, i.e. sales volume, cost and profit. It aims at classifying the dynamic relationship existing between total cost and sale
volumeof a company.
It is also used to determine when your business will be able to cover all its expenses and begin to make a profit.
It is also known as “cost-volume-profit analysis”.
Prob. 3. A company sales 3000 units @ Tk. 100 per unit. Its fixed Tk. 60000 and CM ratio 40%. Require
1. Calculate CM Ratio and Profit
2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 100000.
6. Calculate BEP if selling price is increased by 10%.
Prob. 4. The following data is obtained from the cost record of a company:
Sales 3000 units Tk. 100 per unit. Direct Materials Tk. 30 per unit. Direct labour Tk. 20 per unit.
Factory overhead Tk. 30 per unit ( of which 2/3 fixed). Require
1. Calculate variable costs, fixed costs, CM Ratio and Profit
2. Calculate BEP in units and BE sales volume.
3. Calculate amount of profit if sales are 3500 units.
4. Calculate sales volume if the company earns amount of profit of Tk. 120000.
5. Calculate BEP if selling price is increased by 10%.
Prob. 5. A company sales 3000 units @ Tk. 100 per unit. Its M/S 50% and CM ratio 40%. Require
1. Calculate variable costs, fixed costs CM Ratio and Profit
2. Calculate BEP in units and BE sales volume.
Prob. 6. The following data is obtained from the cost record of a company:
BEP 1500 units, sales Tk. 100 per unit, CM ratio 40%.
1. Calculate CM Ratio and Profit, variable cost and fixed costs.
2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety.
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 120000.
Prob. 7. The following data is obtained from the cost record of a company:
Sales 3000 units @ Tk. 100 per unit, profit Tk. 60000 and CM ratio 40%. Require
1. Calculate CM Ratio and Profit and fixed cost.
2. Calculate BEP in units and BE sales volume.
3. Calculate Margin of Safety’
4. Calculate amount of profit if sales are 4000 units.
5. Calculate sales volume if the company earns amount of profit of Tk. 120000.