1. Break-even Analysis
Lecture-30
Main Ahmad Farhan

2. Break-even Analysis
The Point of sales at which the entity earn no profit and sustain no loss.

3. Contribution Margin Ratio = Contribution margin / Sales x 100

4. Example Sales 700 units x Rs 8 5,600
Variable cost 700 units x Rs 8 4,200
Contribution margin 1,400
Fixed cost 1,000
Profit

5. Example Sales 700 units x Rs 8 5,600
Variable cost 700 units x Rs 8 4,200
Contribution margin 1,400
Variable cost over sales
4200 / 5600 x 100 =75%
Contribution margin over sales
1400 / 5600 x 100 = 25%

6. Per Unit Reaction Sales price Rs 8 Less Variable cost (6)
Contribution Margin
6 / 8 x 100 = 75%
2 / 8 x100 = 25%
Contribution margin per unit / Sales price Per unit x 100

7. Break even point refers to the volume (sales) at which the entity earns no profit and suffers no loss.
Point at which Contribution margin = Fixed cost
Target profit = 0

8. Contribution margin – Fixed cost = 0 Profit
At break even point the target contribution is equal to the fixed cost

9. Contribution Margin – Fixed cost = Profit

10. Example Sales 700 units x Rs 8 5,600
Total
Percentage
Per Unit
Sales 700 units x Rs 8 5,600
Variable cost 700 units x Rs 8 4,200
Contribution margin 1,400
Fixed cost ,000
Profit
100% 8
75% 6
25% 2

11. Formula x = Required amount Given Amount % of required amount
% of given amount x =
Required amount
In absolute terms

12. Target Contribution Margin
Rs 1,000 / 25 x 100 = Rs 4,000 OR
Rs 1,000 x 1 / .25 = 4,000
Rs 1,000 / .25 = 4,000

13. Break-even Sales
B. E (s) = Fixed cost
Contribution to sales ratio

14. Example Sales 500 units x Rs 8 4,000
Variable cost 500 units x Rs 6 3,000
Contribution margin 1,000
Fixed cost 1,000
Profit

15. Unity Method
Rs 8 sales / Rs 2 contribution margin x 100 Target Contribution margin = Break even sales Rs. 4,000

16. Break-even in Quantity
4,000 / 8 = 500 units
Target CM / CM per unit
Fixed Cost / CM per unit
= Rs. 1,000 / 2 = 500 units

17. Formulas
Break even sales in Rupees = Target CM / Contribution to sales ratio
Break even = Target CM / Contribution margin per unit