1. Cost & Management Accounting Break-even Analysis Lecture-31 Mian Ahmad Farhan (ACA)

2. Practice Question A company sold a fans at Rs 2,000 each. Variable cost Rs. 1200 each and fixed cost Rs. 60,000. Calculate: a. Calculate break even sales in Rupees. b. Break even sales in units. c. Sales in units to earn a profit of Rs. 20,000.

3. Solution Contribution to sales ratio = Contribution margin Sales = 800 / 2,000 = 0.4 a) Break-even sales in Rupees = Fixed cost C/S Ratio = 60,000 / 0.4 = Rs. 1,50,000

4. Solution b) Break-even sales in units = Fixed cost Contribution margin per unit = 60,000 / 800 = 75 units

5. Solution c) Target profit Rs 20,000 Target contribution = Target profit + Fixed cost = Target contribution margin Contribution margin per unit = 80,000 / 800 = 1,000 units

6. Check Break-even Sales 75 x 2,000 1,50,000 Less Variable cost (1,50,000 x 60%) 90,000 Contribution margin 60,000 Less Fixed cost 60,000 Profit 0

7. Check Target Profit Sales 100 x 2,000 2,00,000 Less Variable cost (2,00,000 x 60%) 90,000 Contribution margin 80,000 Less Fixed cost 60,000 Profit 20,000

8. Variable Cost Ratio Variable cost Sales = 1,200 / 2,000 x 100 = 60% X 100

9. Margin of Safety (MOS) Budgeted sales – Break-even sales

10. Example Sales700 units x Rs 8 5,600 Variable cost700 units x Rs 8 4,200 Contribution margin1,400 Fixed cost 1,000 Profit 400

11. Example Sales500 units x Rs 8 4,000 Variable cost500 units x Rs 6 3,000 Contribution margin1,000 Fixed cost 1,000 Profit 0

12. Margin of Safety Budgeted sales – Break-even sales = 5,600 – 4,000 = 1,600

13. Margin of Safety Ratio a). Margin safety Budgeted sales = 1,600 / 5,600 x 100 = 28.57% b). Budgeted profit Budgeted contribution margin = 400 / 1,400 x 100 = 28.57% c). Profit to sales ratio Contribution to sales X 100

14. Margin of Safety Ratio Profit to sales ratio = 400 / 5,600 x 100 = 7.14% Contribution to sales ratio = 1,400 / 5,600 x 100 = 25% Profit to sales ratio Contribution to sales = 7.14 % / 25% = 28.56% or 28.57%

15. Example Budgeted sales 10,000 Less variable cost 6,000 Contribution margin 4,000 Less Fixed cost 2,500 Profit 1,500 Calculate Margin safety ratio?

16. Solution Budgeted profit Budgeted contribution margin =1,500 / 1,000 x 100 = 37.5% P/S Ratio C/S Ratio

17. Solution Profit / Sales x 100 = 1,500 / 10,000 x 100 = 15% Contribution margin / Sales x 100 = 4,000 / 10,000 x 100 = 40% Margin of safety ratio = 15% / 40% = 37.5%

18. Example Sales= Rs. 50,000 Margin of safety = 25% Calculate break even sales? MOS = 50,000 x 25% = 12,500 MOS = Budgeted sales - Break even sales Budgeted sales - MOS = Break even sales 50,000 -12,500 = 37,500

19. Example Sales = Rs. 50,000 MOS ratio = 25% Budgeted profit = Rs. 2,500 a). Compute projected profit b). Prepare Budgeted sales sheet

20. Solution Budgeted sales50,000 Less Variable cost40,000 Contribution margin 10,000 Less Fixed cost 7,500 Profit 2,500

21. MOS ratio = Profit Contribution margin = 2500 Contribution margin = 0.25 0.25 contribution margin = 2,500 Contribution margin = 2,500 / 0.25 Contribution margin = Rs. 10,000

22. Break even sales = Fixed cost C/S ratio Budgeted sales37,500 Less Variable cost30,000 Contribution margin 7,500 Less Fixed cost 7,500 Profit 0 = 7,500 / 0.20 = 37,500

23. Example Combine Break even XYZ Selling price (P.U)2.50410 Variable cost (P.U)(1.50)(2)(4) Contribution margin (P.U) 126 Sales Volume80,00030,00015,000 Fixed cost Rs. 1,50,000

24. Solution XYZTotal Contribution margin (1 x 80,000) =80,000 (2 x 30,000) = 60,000 (6 x 15,000) = 90,000 2,30,000 Sales(2.5 x 80,000) = 2,00,000 (4 x 30,000) = 1,20,000 (10 x 15,000) = 1,50,000 4,70,000

25. Contribution to sales ratio = 2,30,000 / 4,70,000 = 48.936 or 0.489 XYZ Contribution margin ratio 80,000 / 2,00,000 x 100 = 40% 60,000 / 1,20,000 x 100 = 50% 90,000 / 1,50,000 x 100 = 60%

26. Break even sales = Target contribution margin C/S ratio = 1,50,000 / 0.48936 = 3,06,523