CVP ANALYSIS

Breakeven Point and

Target Income

CVP ANALYSIS

• Breakeven point (BEP) is that quantity of output sold at which total revenues equal total costs resulting to zero operating income.

• USE of BEP: tells managers how much output they have to sell to avoid a loss

Contribution Income Statement for Different Quantities of Do-All Software Packages Sold

Per package

Number of Packages Sold

0 1 5 25 40

Revenues 200 0 200 1,000 5,000 8,000

Variable Costs 120 0 120 600 3,000 4,800

Cont. Margin 80 0 80 400 2,000 3,200

Fixed Costs 2,000 2,000 2,000 2,000 2,000

Operating Income

(2,000) (1,920) (1,600) 0 1,200

Breakeven Point and Target Income

BEP (units) = Fixed costs = $2000 = 25 units

Cont margin/unit $80

BEP revenues = Fixed costs = $2000 = $5,000

Cont margin % 40%

Cont margin % = Cont margin per unit = $80 = 40%

Selling price $200

Target Operating Income

Quantity of units = FC + target operating income

required to be sold Cont margin per unit

Quantity of units = $2000 + $1200 = 40 units

required to be sold $80 per unit

Revenues needed = $2000 + $1200 = $3200 = $8000

To earn $1200 Cont margin 40% .40