Breakeven, Slides of Managerial Economics

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Breakeven Analysis Or

Cost-Volume- Profit(CVP) Analysis

Breakeven Analysis

Defined



Breakeven analysis examines the

short run relationship between

changes in volume and changes

in total sales revenue, expenses

and net profit



Also known as C-V-P analysis

(Cost Volume Profit Analysis)

Cost-Volume-Profit Analysis

4

Cost-volume-profit or breakeven analysis examines

the relationship among the TR, TC, and total profits

of the firm at various levels of o/p. This technique is

often used by business executives to determine the

sales volume required for the firm to break even

and the total profits and losses at other sales levels.

The analysis uses a cost-volume-profit chart in

which the TR and TC curves are represented by

straight lines and the break-even o/p (Q

B) is determined at

their intersection.

Cost-Volume-Profit Analysis

5

The slope of the total

revenue TR curve

refers to the product

price of $10 per unit.

The vertical intercept

of the total cost of

(TC) curve refers

TFC of $200, and the

slope of the TC

curve to the AVC of

$5. The break-even

with TR=TC $400 at

the output (Q) of $

units per time period

at the point B.

Breakeven Formula

Fixed Costs

*Contribution margin per unit

*Contribution margin per unit = Selling Price per

unit – Variable Cost per unit

Break-even o/p

8

Q

BE = TFC/(P - AVC)

P = 10

TFC = 200

AVC = 5

QBE = 40

Example



Increase in the price of the

commodity

shown by increasing slope of TR



An increase in the TFC –

by an increase in vertical intercept

of TC curve



An Increase in the Average

variable cost –

by an increase in the slope of TC

curve

Limitations of B/E

analysis



Costs are either fixed or variable



Fixed and variable costs are clearly

discernable over the whole range of

output



Production = Sales



One product/constant sales mix



Selling price remains constant



Efficiency remains unchanged



Volume is the only factor affecting

costs

Key Terminology ctd.



Margin of safety - a measure in which

the budgeted volume of sales is

compared with the volume of sales

required to break even



Marginal Cost – cost of producing

one extra unit of output

Breakeven Chart

Example 1

Using the following data,

calculate the

breakeven point and margin of

safety in units:



Selling Price = €



Average Variable Cost = €



Fixed Cost = €70,



Budgeted Sales = 7,500 units

Example 1: Solution



Contribution = €50 - €40 = €

per unit



Breakeven point = €70,000/€

= 7,000 units



Margin of safety = 7500 – 7000 =

500 units

Example 2

Using the following data,

calculate the level of

sales required to generate a

profit of €10,000 :



Selling Price = €



Average Variable Cost = €



Fixed Costs = €50,

Example 2: Solution



Contribution = €35 – €20 = €



Level of sales required to

generate profit of €10,000:

4000 units