AAT Level 3Break Even Analysis

Objectives1) 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

£Direct Materials X+ Direct Labour

X+Direct Expenses X+ Production OH *

XAbsorption Cost

X

£Direct Materials X+ Direct Labour

X+Direct Expenses X+ Production OH

XMarginal Cost X

* Remember that Overheads are absorbed

throughout the period using the OAR

Marginal CostIS

Variable Cost

Absorption Costing Marginal Costing

Chocolate!!!

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 150Marginal Cost 1500Remember that MC is VC!

£Selling price3000Les Variable Costs1500Contribution1500Fixed Costs 700Profit 800

Break Even Where total costs = Total Sales

BE in Units = Fixed CostsContribution

BE in Value =Break Even Point (units) x Selling Price Per Unit

Activity 1 - Carl WrightCarl 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 £19Variable Cost per unit £14Contribution per unit £5

Calculate the Break Even Point

Total Fixed CostsContribution per unit

£200 = 40 units £5

Break even point in units = 40 Break Even in £ = 40 x £19 = £760

Activity 2 – Norfolk Press

Activity 2

Now try Activity 3

Margin of Safety

Either:Actual Output – Break Even Point

Or:

Margin of Safety (output) X 100Output produced

As a %

In units

Activity 4a) 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

b) If Carl produced 55 units his margin of safety would be:

= Actual Output – Break Even Point

BE point (from page 4) = 40Output = 55

50 – 40 = 15

Margin of Safety = 15 units

c) If Carl produced 60 units his margin of safety as a percentage would be: = Actual Output – Break Even Point

BE point (from page 4) = 40Output = 60

60 – 40 = 20

Margin of Safety = 20 units

Margin of Safety (output) X 100%Output

= 20 x 10060

= 33%

d) At an output of 70 units Carls percentage MOS would be:

= Actual Output – Break Even Point

BE point = 40Output = 70

70 – 40 = 30

Margin of Safety = 30 units

Margin of Safety (output) X 100%Output

= 30 x 10070

= 42.9%

Break Even ChartsX 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

Break even can also be calculated using a chart

Break Even Chart

Ian Taylor

Hand-out

Your turn!Complete activities 6 & 7

Selling Price per unit 19Variable Costs per unit 14Contribution per unit 5

Total Contribution (80 x 5) £400Less fixed costs £200Profit £200

Targeted/Expected Profit

= Total Fixed Costs + Expected ProfitContribution per Unit

Carl Wright (Activity 1) (Requires £200 profit)

= 200 (FC) + 200 (EP) = 80 units 5

Activities 8 - 12

Activity 13 – Batman & Robin

1,000,000

2.50

480,000

400,000

Selling Price per unit

Sales Revenue ÷ Budgeted Units5000000 ÷ 500000 = £10

Unit Contribution

= Selling Price – Variable Costs

Variable Costs per unit1,000,000+1,250,000+1,500,000 = 3,750,000Per unit = 3750000 ÷ 500000 = £7.50

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

Question 12 – Batman & Robin

1,000,000

2.50

480,000

400,000

80,000

Margin of Safety= Output – Break even output

=480000 – 400000 = 80,000 units

Margin of Safety as a %= MOS ÷ Output x 100= 80,000 ÷ 480,000 x 100= 16.67%

16.67

Complete Robin

Profit Volume Ratio

£ Contribution per Unit x 100£Selling Price per Unit

Shows contribution per £ of sales

(%)

Can be converted to a decimal

Profit Volume Ratio

Break even point £ = Fixed CostProfit Volume Ratio

Calculated on previous slide

Can also be used for target

profit(just add

targeted profit to the top line)

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 costsPVR (decimal)

= 1100 = £14100.78

Practice Activities 14 - 17

Activities 16-17Will require some applied

thinking!

Profit-Volume Charts

Activity 19

b) £13,000

a) 2500 units