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2014 Bep Analysis Exercises

The document discusses calculating break-even point using the equation method. It provides the basic cost-volume-profit (CVP) equation for calculating break-even point in units and sales dollars. An example calculation is shown using information on price, variable costs, fixed costs and current sales. Two additional exercises provide more examples of using the break-even point equation and calculating the sales volume needed to achieve a target profit level.

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134 views

2014 Bep Analysis Exercises

The document discusses calculating break-even point using the equation method. It provides the basic cost-volume-profit (CVP) equation for calculating break-even point in units and sales dollars. An example calculation is shown using information on price, variable costs, fixed costs and current sales. Two additional exercises provide more examples of using the break-even point equation and calculating the sales volume needed to achieve a target profit level.

Uploaded by

aimee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercise 1

Break-even Point Equation Method

Break-even is the point of zero loss or profit. At break-even point, the revenues of the business
are equal its total costs and its contribution margin equals its total fixed costs. Break-even point
can be calculated by equation method, contribution method or graphical method. The equation
method is based on the cost-volume-profit (CVP) formula:

px = vx + FC + Profit

Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.

Calculation

BEP in Sales Units

At break-even point the profit is zero therefore the CVP formula is simplified to:

px = vx + FC

Solving the above equation for x which equals break-even point in sales units, we get:

FC

Break-even Sales Units = x =

p−v

BEP in Sales Dollars

Break-even point in number of sales dollars is calculated using the following formula:

Break-even Sales Dollars = Price per Unit × Break-even Sales Units

Example

Calculate break-even point in sales units and sales dollars from following information:
Price per Unit $15

Variable Cost per Unit $7

Total Fixed Cost $9,000

Solution

We have,
p = $15
v = $7, and
FC = $9,000

Substituting the known values into the formula for breakeven point in sales units, we get:

Breakeven Point in Sales Units (x)


= 9,000 ÷ (15 − 7)
= 9,000 ÷ 8
= 1,125 units

Break-even Point in Sales Dollars = $15 × 1,125 = $16,875

Exersise 2
Pie house

Fixed Costs Variable Costs


General
R 1 500.00 Flour R 0.50
Labor
Rent R 3 000.00 Yeast R 0.05

Insurance R 200.00 Water R 0.01

Advertising R 500.00 Cheese R 3.00

Peppero
Utitilies R 450.00 R 2.00
ni
Total R 5 650.00 Total R 5.56

Selling at
R10 / pie
Exercise 3
PNG electric company manufactures a number of electric products. Rechargeable light is one
of the PNG’s products that sells for $180/unit. Total fixed expenses related to rechargeable
electric light are $270,000 per month and variable expenses involved in manufacturing this
product are $126 per unit. Monthly sales are 8,000 rechargeable lights.

Required:

1. Compute break-even point of the company in dollars and units.


2. According to a research conducted by sales department, a 10% reduction in sales price
will result in 25% increase in unit sale. Prepare two income statements in contribution
margin format, one using the current price and one using proposed price (10% below
the old sales price).
3. Compute the number of rechargeable lights to be sold to earn a net operating income
of $144,000 per month.

Solution:
(1) Computation of break-even point:

(a). Break even point in units:

Fixed expenses / Contribution margin per unit

270,000 / 54*

= 5000 units

*$180 – $126

(b). Break-even point in dollars can be computed by multiplying break-even point in units by
sales price as shown below:

5000 units × $180

=$900,000

(2) Income statements:

(a) Income statement under current operations:

Total Per unit


Sales (8,000 lights) 1,440,000 $180
Less variable expenses 1,008,000 $126
———— ————
Contribution margin 432,000 $54
Less fixed expenses 270,000 ————
————
Net operating income 162,000
————

(b) Income statement under proposed operations:

Total Per unit


Sales (10,000 lights) 1,620,000 $162
Less variable expenses 1,260,000 $126
———— ————
Contribution margin 360,000 $36
Less fixed expenses 270,000 ————
————
Net operating income 90,000
————

The proposal should not be accepted because it will reduce the contribution margin from $54
per unit to $36 per unit.

(3) Target profit analysis:

We can compute the target income using following equation

Sales = Variable expenses + Fixed expenses + Profit

$162Q = $126Q + 270,000 + $72,000

$162Q – $126Q = $342,000

$36Q = $342,000

Q = $342, 000 / $36

Q = 9,500 Units

At the proposed selling price, company need to sell 9,500 rechargeable lights to earn a profit
of $72,000

Reference:

http://accountingexplained.com/managerial/cvp-analysis/break-even-point-equation-method

http://www.accountingformanagement.org/exercise-1-cvapr/

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