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    BEA Handouts 20

    Uploaded by

    Suraj Kumar
    The document provides an overview of cost volume profit analysis and break even analysis. It defines key terms like contribution margin, gross margin, break even point, break even units, break even revenue, and target operating income. It discusses how to calculate break even units and revenue. It also addresses how to calculate target operating income and quantity of output required to achieve a target profit level. The document uses examples and charts to illustrate break even analysis concepts.

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    BEA Handouts 20

    Uploaded by

    Suraj Kumar
    25 views8 pages
    The document provides an overview of cost volume profit analysis and break even analysis. It defines key terms like contribution margin, gross margin, break even point, break even units, break even revenue, and target operating income. It discusses how to calculate break even units and revenue. It also addresses how to calculate target operating income and quantity of output required to achieve a target profit level. The document uses examples and charts to illustrate break even analysis concepts.

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    Accounting

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    The document provides an overview of cost volume profit analysis and break even analysis. It defines key terms like contribution margin, gross margin, break even point, break even units, break even revenue, and target operating income. It discusses how to calculate break even units and revenue. It also addresses how to calculate target operating income and quantity of output required to achieve a target profit level. The document uses examples and charts to illustrate break even analysis concepts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    25 views8 pages

    BEA Handouts 20

    Uploaded by

    Suraj Kumar
    The document provides an overview of cost volume profit analysis and break even analysis. It defines key terms like contribution margin, gross margin, break even point, break even units, break even revenue, and target operating income. It discusses how to calculate break even units and revenue. It also addresses how to calculate target operating income and quantity of output required to achieve a target profit level. The document uses examples and charts to illustrate break even analysis concepts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    Cost Volume Profit Analysis

    Break Even Analysis

    Prof. Keyur Thaker

    What IF?
    My sales revenue is 1 lacs
    Variable cost per unit increases by 10%
    Selling Price is reduced by 15%
    Sales volume increases by 5%
    Raw Material is cheaper by 15%
    Spice Jet sells its 20 unsold seat to Mumbai at Rs.
    1000.
    Gujarat Gas has to give only 5 connection in Spring
    Valley at Dumas _Surat ?

    1
    Assumptions
    1. Changes in Level of Revenue or cost arrives only if
    the number of units produce sold changes.
    2. Cost can be separated in two components only.
    Fixed and Variable
    3. Graphically, behavior of total cost and revenues are
    linear in relevant range.
    4. Cost and Prices are constant for relevant range.
    5. Single product or constant proportion of Multi
    products
    6. All cost can be added, subtracted or compare
    without taking into account time value of money

    2
    Lets Be Clear
    Contribution Margin = Revenues – All
    variable Cost

    Also called variable unit income

    Gross Margin = Revenues – Cost of


    Goods Sold

    Break Even Point


    The quantity of output sold at which
    total revenue equal to total cost.
    The quantity of output at which
    Operating Income is Zero

    12

    3
    Break Even Units =
    Fixed Cost/ Contribution Margin Per unit.

    Break Even Revenue =


    Fixed Cost / Contribution margin %

    13

    Basic BE Chart

    14

    4
    The Contribution BE Chart

    15

    The Profit Volume Chart

    16

    5
    Target Operating Income =

    (Fixed costs + Target operating income)


    Cont margin per unit or Cont %

    17

    Target Operating Income


    Target Operating Income
    = Target net Income / (1- Tax rate)
    =Revenues – Variable Cost – Fixed Cost

    Quantity of Output Units required


    = (FC + (Target net Income)/(1-T) ) /
    Contribution Margin Per Unit
    For Amount divide by Contribution %

    19

    6
    Other Costs
    Marginal Cost = Cost of Incremental Unit
    Once BEP is reached the marginal cost of
    additional unit is equal to Variable cost of
    unit
    Marginal Cost Pricing is marginal cost +
    profit markup
    Total Cost
    Fixed Cost
    Variable Cost
    20

    If there are Multiple Cost Drivers


    Take different Variable Costs e.g. per unit and per
    order costs...
    Operating Income =
    Revenue – (VCA x No.of A) – (VCB x No.of B).. – FC
    • E.g: No of packages is driver of the Cost of Do it all S/w
    Package.. Say No of Photocopy
    • No of customer is driver for Cost of preparing documents
    for each customer .. No of Orders to be delivered
    Operating Income = (Rs.200X40)- [(Rs.120 per
    pack X 40) – (Rs.10 per customer X 10 customers)
    – (Rs.2000)
    OI = 8000-4800-400-2000 = 800

    22

    7
    Questions for Davey Bros
    Calculate Break Even if
    Decides to buy new machine costing 50,000/- with useful life of 7 yrs. and no
    maintainece cost for first two year at SP of Re. 1, .75 & .50 each.
    Assuming paper consumption to be in the ratio of 60:40 back to back and one side
    If an office boy needs to be hired for Rs. 1500 pm.
    If the business mix is 20:80, retail and wholesale for photocopy at Re. 1 and .50.
    One year after the operations if we start allocating the overheads, Ravinders Salary,
    Shop rent and electricity on equal basis across three segments.
    How much ad expenses he can afford to get additional business of 50,000 photocopy
    in the ratio of 20:80, retail and wholesale?
    Cash profit Break even.
    Considering target operating income of 30000 over and above salary cost.

    30

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