CHAPTER 3

Breakeven analysis and limiting

factor analysis

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 LEARNING OBJECTIVES

• Calculate the breakeven point, contribution and margin of

safety for a given product or service

• Allocate scarce resources to those products and services

with the highest contribution per unit of limiting factor.

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 TOPIC LIST

3.1 Breakeven analysis and contribution

3.2 Breakeven charts

3.3 Limiting factor analysis

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 3.1 Breakeven analysis
and contribution

3.1.1 Contribution

3.1.2 Breakeven point

3.1.3 The contribution ratio

3.1.4 The margin of safety

3.1.5 Cost-volume-profit analysis and profit targets

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 3.1.1 Contribution

Breakeven analysis or cost-volume-profit (CVP) analysis is the

study of the interrelationships between costs, volume and profit at
various levels of activity

Contribution Sales price Variable cost

COST VOLUME PROFIT

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 3.1.2 Breakeven point

The breakeven point (BEP) occurs when there is neither a profit

nor a loss and so fixed cots equal contribution

Total fixed costs

Breakeven point
Contribution per unit

Contribution required to breakeven

Contribution per unit

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 3.1.3 The contribution ratio

The contribution ratio is a measure of how much contribution is

earned per $1 of sales revenue. It is usually expressed as a
percentage

Total fixed costs

Breakeven point
Contribution ratio

Contribution required to breakeven

Contribution ratio

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 3.1.4 The margin of safety

The margin of safety is the difference between the budgeted

sales volume and the breakeven sales volume. It is sometimes
expressed as a percentage of the budgeted sales volume

The margin The budgeted The breakeven

of safety sales volume sales volume

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 3.1.5 Cost-volume-profit analysis
and profit targets

Profit Contribution Fixed costs

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 3.1.5 Cost-volume-profit analysis
and profit targets
Ex 1: At Firm A, in January, they produced and sold (Q): 1.000 units.
Unit price (p): 100.000 VND / unit.
Variable unit cost (v): 60.000 VND /unit.
Monthly fixed cost (F): 30.000.000 VND.

Require: If They increase the quantity of products produced and sold at 20% for
February, how much profit can be in creased here?

Ratio Total UC Product Quantity increased at 20%

(1.000 (1.000
VND) VND) Q = 1.000x20% = 200 units
Revenue 100.000 100
CM = Q x CM unit
(-) Variable Cost 60.000 60
CM 40.000 40 = 200x(100–60) = 8.000 (1.000 VND)
(-) Fixed Cost 30.000 P = CM = 8.000 (1.000 VND)
Profit 10.000
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 3.1.5 Cost-volume-profit analysis
and profit targets
Ex 2: At Firm A, in January, they produced and sold (Q): 1.000 units.
Unit price (p): 100.000 VND / unit.
Variable unit cost (v): 60.000 VND /unit.
Monthly fixed cost (F): 30.000.000 VND.

Require: If They increase the quantity of products produced and sold at 20% for
February, how much profit can be in creased here?

Ratio Total UC Product Quantity increased at 20%

(1.000 (1.000
VND) VND) R = 100.000x30%= 30.000 (1.000 VND)
Revenue 100.000 100%
P= R x CM %
(-) Variable 60.000 60%
Cost = 30.000x 40% = 12.000ngđ
CM 40.000 40%
(-) Fixed Cost 30.000 P = 12.000 (1.000 VND)
Profit 10.000
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 3.1.5 Cost-volume-profit analysis
and profit targets
Breakeven Point (IP):
Ex 3:T Firm has the information as:
- Unit Price: 500 vnd/unit.
- Variable Cost: 300 vnd/unit.
- CM Unit: 200 vnd/unit.
- CM %: 40% Identify BEP:
- Monthly Fixed Cost: 100.000 vnd Q BEP = F / (p-v)
Identify the BEP ? Q BEP = 100.000 / (500 – 300)
= 500sp
Formula
- Quantity BEP
S BEP = Q BEP x p
Q BEP = F / CM unit
= 500 units x 500 vnd/unit
= 250.000 vnd.
- Sale BEP
S BEP = F / CM %

S BEP = Q BEP x p

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 3.1.5 Cost-volume-profit analysis
and profit targets
Decision to Advertise:
T Firm:
- Monthly quantity sold: 1.000 units Ex 4 (F, Q):
- Unit Price: 500 vnd/unit Forecasting:
- Variable Unit Cost: 300 vnd/unit - Advertised Fee increased for 32.000đ
- CM Unit: 200 vnd/unit - Quantity increased at 20%
- CM: 200.000 vnd Require: Should T does?
- CM %: 40%
- Fixed Cost: 100.000 vnd
Revenue increased for:
= 500 x (1000 x 20%)
Solution:
CM increased for
- Calculation CM.
= 500 x (1.000 x 20%) x 40% = 40.000đ
- Calculation Fixed Cost.
Fixed Cost increased for = 32.000đ
 Profitable
Profitable changed :
= +40.000 – 32.000 = + 8.000đ>0
+ P >0: Yes
+ P<0: No => Should do.

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 3.1.5 Cost-volume-profit analysis
and profit targets
Decision to Advertise: Con’t d
T Firm: Ex 5 (F, Q, p):
- Monthly quantity sold: 1.000 units Forecasting:
- Unit Price: 500 vnd/unit Reducing unit price for 40 vnd/unit.
- Variable Unit Cost: 300 vnd/unit - Increasing Advertise Fee for 9.000đ/month
- CM Unit: 200 vnd/unit - Quantity increased at 30%.
- CM: 200.000 vnd Require: Should T does?
- CM %: 40%
- Fixed Cost: 100.000 vnd New CM:
Solution: = 1000 x 130%x (200 - 40) = 208.000 vnd
- Calculation CM. CM increased for:
- Calculation Fixed Cost. = 208.000 – 200.000 = 8.000 vnd
 Profitable Fixed Cost increased for: 9.000đ
Profitable changed:
+ P >0: Yes = +8.000 – 9.000 = - 1.000đ <0
+ P<0: No => Should not.

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 3.1.5 Cost-volume-profit analysis
and profit targets
Decision to adjust Selling Price:
T Firm: Ex 6 (v, F, Q, p): Forecasting:
- Monthly quantity sold: 1.000 units - Changing payroll payments
- Unit Price: 500 vnd/unit 15.000vnd/month-> 8.000 vnd/month.
- Variable Unit Cost: 300 vnd/unit + 12vnd/unit price.
- CM Unit: 200 vnd/unit - Decreasing Selling price 30 vnd/unit.
- CM: 200.000 vnd - Quantity sold increasing 20%
- CM %: 40% Require: Should T does?
- Fixed Cost: 100.000 vnd New CM
= 1000 x 120%x (200 – 12 - 30) = 189.600vnd
Solution: CM changed:
- Calculation CM. = 189.600 – 200.000 = - 10.400vnd
- Calculation Fixed Cost. FC changed:
 Profitable = 8.000 – 15.000 = - 7.000vnd
P changed:
+ P >0: Yes = - 10.400 + 7.000 = - 3.400đ <0
+ P<0: No => Should not.

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 3.1.5 Cost-volume-profit analysis
and profit targets
Decision to adjust Target Price:
T Firm:
Monthly quantity sold:1.000 units Ex 7 : Forecasting:
Unit Price: 500 vnd/unit Client wants to purchase 200units more.
Variable Unit Cost: 300 vnd/ unit The required price less14% than current.
- CM Unit: 200 vnd/unit T want to receive P from this >=20.000đ
- CM: 200.000 vnd Require: Should T?
- CM %: 40%
- Fixed Cost: 100.000 vnd
CM changed:
Solution: = 200 x (200 – 500 x 14%) = 26.000đ
- Calculation CM. FC not be changed.
- Calculation Fixed Cost. Profit Changed:
 Profitable = 26.000 -0 = 26.000đ >20.000 vnd
=> T should do.
+ P min >0: Yes
+ P min <0: No

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 3.1.5 Cost-volume-profit analysis
and profit targets
Decision to adjust Target Price: Con’t d
T Firm:
- Monthly quantity sold: 1.000 units Ex 8 :
- Unit Price: 500 vnd/unit T getting loss 15.000 vnd
- Variable Unit Cost: 300 vnd/unit Client wants to purchase 200 units more with
- CM Unit: 200 vnd/unit The price less thang 4% .
- CM: 200.000 vnd T wants the get final profit at 20.000 vnd.
- CM %: 40% Require: Should T does?
- Fixed Cost: 100.000 vnd
Variable Unit Cost: = 300vnd/unit
Solution: FC needed to used more: 15.000/200
Identify selling price of T (a) = 75 vnd/unit
Identify required selling price (b) Unit P: 20.000/200 = 100 vnd/unit
Selling Price of T:
+ a < b: Should = 300 + 75 + 100 = 475vnd/unit
+ a > b: Should not Required price: 500 x 96% = 480 vnd/unit
 T should do.

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 3.1.5 Cost-volume-profit analysis
and profit targets

 Ex 9: CVP analysis
Company A makes a product which has a variable cost of $5
per unit; fixed costs are $63,000 per annum; a sales volume
of 12,000 units. Calculate the selling price per unit

 Ex 10 : Target profits
Company B has variable costs of $24 per unit; fixed costs are
$68,000 per annum; the sales price is $30 per units; profit of
$16,000 per annum. Calculate the sales required to achieve
this profit.

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 3.1.5 Cost-volume-profit analysis
and profit targets

 Ex 11: Change in selling price

Company C makes a product which has a variable cost of
$0.15 per unit and the current sales price is $0.25 per unit.
Fixed costs are $2,600 per month and the annual profit for the
company at the current sales volume is $36,000. The sales
manager wishes to raise the sales price to $0.29 per cake, but
considers that a price rise will results in some loss of sales.
Ascertain the volume of sales required each month to
maintain current profitability, if the selling price is raised to
$0.29

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 3.1.5 Cost-volume-profit analysis
and profit targets
 Ex 12: Target profits
Company D has variable costs of $8 and a variable selling
cost of $2 per unit. Fixed costs are $40,000 per annum; the
sales price is $18 per units; and the current volume of output
and sales is 6,000 units. The company is considering whether
to hire an improved machine for production. Annual hire costs
would be $10,000 and it is expected that the variable cost of
production would fall to $6 per unit. Requirements:
a/ Determine the number of units that must be produced and
sold to achieve the same profit as is currently earned, if the
machine is hired
b/ Calculate the annual profit with sales remain at 6,000 units
per annum
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 3.2 Breakeven charts

3.2.1 Breakeven charts

3.2.2 Lines on a breakeven chart

3.2.3 Interpreting the breakeven chart

3.2.4 The contribution breakeven chart

3.2.5 Limitations of breakeven or CVP analysis and

breakeven charts

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 3.2.1 Breakeven charts

A breakeven chart is a charts that indicates the profit or loss at

different levels of sales volume within a limited range:
- A horizontal axis showing the sales/ output
- A vertical axis showing $ for sales revenues and cost

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 3.2.2 Lines on a breakeven chart
A traditional breakeven chart has a line for sales revenue, for
fixed costs and for total costs.

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 3.2 Breakeven charts
3.2.3 Interpreting the breakeven chart
The breakeven point is at the intersection of the sales line and the
total costs line.

3.2.4 The contribution breakeven chart

A contribution breakeven chart depicts variable costs, so that
contribution can be read directly from the chart

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 3.2 Breakeven charts
Revenue & Cost 1.000$
Sales revenue
300

250
Total cost
200

150
Variable cost
100
Fixed costs
50
Number of units

0 10 20 30 40 50 60

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 3.2.5 Limitations of breakeven
or CVP analysis
and breakeven charts

CVP analysis is a useful technique for managers. It can provide

simple and quick estimates and breakeven charts provide a
graphical representation of breakeven arithmetic. Despite the
usefulness of breakeven analysis, the technique has some
serious limitations

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 3.3 Limiting factor analysis

3.3.1 Limiting factors

3.3.2 Limiting factor situations

3.3.3 Limiting factor analysis and restricted

freedom of action

3.3.4 Make or buy decision and scarce resources

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 3.3 Limiting factor analysis
3.3.1 Limiting factors

A limiting factor is anything which limits the activity of an entity

3.3.2 Limiting factor situations

If a specific resource is a limiting factor, contribution will be

maximised by earning by earning the highest possible
contribution per unit of limiting factor

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 3.3 Limiting factor analysis
What if:
T firm does prints and enlargements?

Prints Enlargements

Selling price $.60 $1.00

Variable cost .36 .56

Contribution margin $. 24 $. 44

Total Fixed Costs $1,820

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 3.3 Limiting factor analysis
T firm product mix: For every 9 prints sold U-
Develop sells 1 enlargement.

Weighted Average Contribution Margin

9/10 $.24 1/10 $.44 $ .26

9/10
Breakeven
6,300 prints
$1,820 7,000
$.26 1/10
700 enlargements
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 3.3 Limiting factor analysis
3.3.3 Limiting factor analysis and restricted freedom of action

To establish the contribution maximising product or service mix

the products or services must be ranked in order of their
contribution earning ability per unit of limiting factor

3.3.4 Make or buy decision and scarce resources

In a situation where a company must sub-contract work to make

up a shortfall in its own in-house capabilities, total costs will be
minimised if those units bought in have the lowest extra variable
cost of buying per unit of limiting factor saved by buying
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 Terms to learn
TERMS TO LEARN Vietnamese
Breakeven point (BEP) Điểm hòa vốn
Contribution margin ratio Chỉ số số dư đảm phí
Contribution income Bảng kết quả hoạt động kinh
statement doanh
Contribution margin Số dư đảm phí
Contribution margin per
Số dư đảm phí đơn vị
unit
Contribution margin
% số dư đảm phí
percentage

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 Terms to learn
TERMS TO LEARN Vietnamese
Margin of safety Số dư an toàn
Cost–volume–profit
Phân tích chi phí, sản lượng và
(CVP)
doanh thu
analysis
Outcomes Thu nhập
Probability Khả năng
Sales/ revenue Doanh thu

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 Chapter Summary

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 Self- Preparation

Material [1] Chapter 10, Self-test 1->5

Material [2] Chapter 10, Multiple choices 1->20
Material [3] Chapter 3, Question 3.17, P. 116
Material [4] Reading: chapter 3 – CVP analysis, P. 73-
96 and chapter 8, P. 257-273

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 Multiple Choices

1) Managers use cost-volume-profit (CVP) analysis to

________.

A) forecast the cost of capital for a given period of time;

B) to study the behavior of and relationship among the

elements such as total revenues, total costs, and income;

C) estimate the risks associated with a given job;

D) analyze a firm's profitability and help to decide wealth

distribution among its stakeholders.

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 Multiple Choices

2) One of the first steps to take when using CVP

analysis to help make decisions is ________.

A) calculating the break-even point;

B) identifying the variable and fixed costs;

C) calculation of the degree of operating leverage for

the company;

D) estimating the volume of sales to make a good

profit.

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 Multiple Choices

3) Which of the following is true of cost-volume-

profit analysis?

A) The theory assumes that all costs are variable;

B) The theory assumes that units manufactured

equal units sold;

C) The theory states that total variable costs remain

the same over a relevant range;

D) The theory states that total costs remain the same

over the relevant.

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 Multiple Choices

4) The selling price per unit less the variable cost

per unit is the ________.

A) fixed cost per unit;

B) gross margin;

C) margin of safety;

D) contribution margin per unit.

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 Multiple Choices

5) As per CVP, operating income calculations use

________.

A) net income and dividends;

B) income tax expense and net income;

C) contribution margins and fixed costs;

D) nonoperation revenues and nonoperation

expenses.

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 Multiple Choices

6) Which of the following is true about the

assumptions underlying basic CVP analysis?

A) Selling price varies with demand and supply of the

product;

B) Only selling price and variable cost per unit are

known and constant;

C) Only selling price, variable cost per unit, and total

fixed costs are known and constant;

D) Selling price, variable cost per unit, fixed cost per

unit, and total fixed costs are known and constant.
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