1. AAT Level 3
Break Even Analysis

2. Objectives
1) Define the term ‘Break-even analysis’; 2) Calculate the contribution per unit, break-even point, total cost and profit/ (loss) using the calculation and table methods. 3) Interpret Break-even charts and use these charts to calculate the break-even point; margin of safety; profit/ (loss) at different production levels 4) Calculate target profit required 5) Use the profit volume ratio to calculate sales revenues at the break-even point 6) Analyse profit-volume charts 7) Describe the advantages and disadvantages of using Break-even analysis 8) Discuss when break-even is used

3. Absorption Costing Marginal Costing
£ Direct Materials X + Direct Labour X +Direct Expenses X + Production OH * X Absorption Cost X
Direct Materials X
+ Direct Labour X
+Direct Expenses X
+ Production OH X
Marginal Cost X
* Remember that Overheads are absorbed throughout the period using the OAR
Marginal Cost IS
Variable Cost

4. Chocolate!!! £ £ Direct Materials 1000 Selling price 3000
Example – Manufacturing chocolates
500 units had total variable costs of £1500
Selling price is £6 each = £3000
Fixed costs are £700
Direct Materials 1000
+ Direct Labour 350
+Direct Expenses 150
Marginal Cost 1500
Remember that MC is VC!
Selling price 3000
Les Variable Costs 1500
Contribution 1500
Fixed Costs
Profit

5. Where total costs = Total Sales
Break Even
Where total costs = Total Sales
BE in Units = Fixed Costs
Contribution
BE in Value =
Break Even Point (units) x Selling Price Per Unit

6. Activity 1 - Carl Wright
Carl Wright, a market trader, makes and then sells his surfers neckwear for £19 each. The Variable Cost of producing each item is £14. This is also the Marginal Cost.
Carl also has Fixed Costs of £200 a week for his sales pitch at an indoor market.
Calculate the contribution per unit and the break even point.
Calculate the contribution per unit
Selling Price per unit £19
Variable Cost per unit £14
Contribution per unit £5
Calculate the Break Even Point
Total Fixed Costs
Contribution per unit
£200 = 40 units £5
Break even point in units = 40 Break Even in £ = 40 x £19 = £760

7. Activity 2 – Norfolk Press

8. Now try Activity 3

9. Margin of Safety
Either: Actual Output – Break Even Point Or: Margin of Safety (output) X 100 Output produced
In units
As a %

10. a) If Carl produced 70 units his margin of safety (MOS) would be:
Activity 4
a) If Carl produced 70 units his margin of safety (MOS) would be:
MOS = Actual Output – Break Even Point
BE point (from Activity 1) = 40 units
Output = 70 units
70 – 40 = 30 units
Margin of Safety = 30 units

11. b) If Carl produced 55 units his margin of safety would be:
= Actual Output – Break Even Point
BE point (from page 4) = 40
Output = 55
50 – 40 = 15
Margin of Safety = 15 units

12. c) If Carl produced 60 units his margin of safety as a percentage would be:
= Actual Output – Break Even Point
Margin of Safety (output) X 100%
Output
BE point (from page 4) = 40
Output = 60
60 – 40 = 20
Margin of Safety = 20 units
= 20 x 100 60
= 33%

13. d) At an output of 70 units Carls percentage MOS would be:
= Actual Output – Break Even Point
BE point = 40
Output = 70
70 – 40 = 30
Margin of Safety = 30 units
Margin of Safety (output) X 100%
Output
= 30 x 100 70
= 42.9%

14. Break Even Charts X axis is sales in units Y axis is costs in £
Using the information Carl Wright produce a breakeven chart
It should have a key, axis labels and an appropriate heading

15. Break Even Chart Break even can also be calculated using a chart
Describe the different features of a break even chart.

16. Ian Taylor
Hand-out

17. Your turn! Complete activities 6 & 7

18. Targeted/Expected Profit
= Total Fixed Costs + Expected Profit Contribution per Unit
Selling Price per unit 19
Variable Costs per unit 14
Contribution per unit 5
Total Contribution (80 x 5) £400
Less fixed costs £200
Profit £200
Carl Wright (Activity 1) (Requires £200 profit)
= 200 (FC) (EP) = 80 units 5

19. Activities

20. Activity 13 – Batman & Robin
Selling Price per unit
Sales Revenue ÷ Budgeted Units
÷ = £10
Unit Contribution
= Selling Price – Variable Costs
Variable Costs per unit
1,000,000+1,250,000+1,500,000 = 3,750,000
Per unit = ÷ = £7.50
1,000,000
2.50
400,000
480,000
Unit Contribution
= Selling Price – Variable Costs
= £10 - £7.50 = £2.50
Break even (units)
= Fixed Costs ÷ Contribution per unit
= 1,000,000 ÷ 2.50
= 400,000 units

21. Question 12 – Batman & Robin
Margin of Safety
= Output – Break even output
= – = 80,000 units
1,000,000
2.50
400,000
480,000
80,000
16.67
Margin of Safety as a %
= MOS ÷ Output x 100
= 80,000 ÷ 480,000 x 100
= 16.67%

22. Complete Robin

23. Profit Volume Ratio Can be converted to a decimal
£ Contribution per Unit x 100 £Selling Price per Unit
Shows contribution per £ of sales
(%)
Can be converted to a decimal

24. Profit Volume Ratio
Break even point £ = Fixed Cost Profit Volume Ratio
Can also be used for target profit
(just add targeted profit to the top line)
Calculated on previous slide

25. Contribution per unit £25 Selling price per unit £32 Fixed costs £1100
Question 13: Using the PV ratio, what is the sales revenue required to break-even?
Contribution per unit £25
Selling price per unit £32
Fixed costs £1100
£ contribution per unit x 100
£ selling price per unit
= 25 X 100 32
= 78.13% or (0.78 as a decimal)
Sales Required to Break Even
= £ Fixed costs
PVR (decimal)
= = £1410
0.78

26. Will require some applied thinking!
Practice Activities
Activities 16-17
Will require some applied thinking!

27. Profit-Volume Charts

28. Activity 19
b) £13,000
a) 2500 units