Break Even Analysis-MBA

Cost-Volume-Profit Analysis
Prof.R.Chandrasekhar Ph.D
Common Cost Behavior Patterns
 Variable Costs
 Fixed Costs
Variable 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 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 Costs
Mixed Costs
 Equation Abbreviations
x = Quantity of units produced and sold

SP = Selling price per unit
VC = Variable cost per unit
TFC = 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
 $0 = SP(x) – VC(x) – TFC
 Margin of Safety
 Difference between expected sales and
break-even sales
Break-Even Point
 Contribution Margin (CM)
 Difference between selling price and
variable cost per unit
Profit = (SP – VC)(x) – TFC
OR
Profit = CM per unit(x) - TFC
 Contribution Margin Ratio
 Contribution of every sales dollar to covering
fixed cost
CM Ratio = SP – VC
SP
 Profit Equation (utilizing CM Ratio)
Sales($) = 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
3. Calculate the break-even point for a

month.
4. How many cakes must be sold to earn a
monthly profit of $9,000?
 Break-Even Point
x = (Profit + TFC) / CM per Unit
x = ($0 + $6,000) / $300
x = 20 cakes
 What if monthly profit is $9,000?

x = ($9,000 + $6,000) / $300
x = 50 cakes
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.
3. Calculate the contribution margin

associated with a pair of speakers.
4. Calculate the contribution margin ratio
for Rhetorix associated with a pair of
speakers. Prof.R.Chandrasekhar Ph.D
 Contribution Margin
CM = SP – VC
CM = $800 - $300
CM = $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 Ratio
CM 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. $65
b. $75
c. $175
d. $30
costs are $130,000. Contribution
margin per unit is?
 $65
 $75
 $175
 $30
costs are $130,000.
Break-Even Point is?
a. 1,000 units
b. 1,083 units
c. 2,000 units
d. None of these
costs are $130,000. Break-Even
Point is?
 1,000 units
 1,083 units
 2,000 units
 None of these
costs are $130,000. Expected sales
are 4,200 units. The
Margin of Safety is?
a. $264,000
b. $384,000
c. $143,000
d. $121,000
are 4,200 units. The Margin of
Safety is?
 $264,000
 $384,000
 $143,000
 $121,000Prof.R.Chandrasekhar Ph.D
are 4,200 units. What is profit
expected to be?
Answer here: _________________

are 4,200 units. What is profit
expected to be?
Answer here: $143,000


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Cost-Volume-Profit Analysis

x = Quantity of units produced and sold

Profit = SP(x) – VC(x) – TFC

 Fundamental to CVP analysis

Profit = (SP – VC)(x) – TFC

Profit = CM per unit(x) - TFC

 Profit Equation (utilizing CM Ratio)

Sales($) = Profit + TFC

 Change in Fixed and Variable Costs

 Change in Selling Price

3. Calculate the break-even point for a

 What if monthly profit is $9,000?

 Fixed costs remain fixed

 Variable costs per unit do not change

3. Calculate the contribution margin

 If the company sells five more speakers

 If the company has sales that are

Answer here: _________________

Answer here: $143,000

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