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Break Even Point Theory

CVP analysis examines changes in profits with changes in sales, costs, and prices. It helps management determine break-even points and sales volumes required for planned profits. Key assumptions are constant prices and costs, linear costs, and no inventory changes. Break-even point is where sales equal total expenses. Contribution margin is sales minus variable costs, used to cover fixed costs then calculate profits. Approaches to break-even analysis include graphical, equation, and contribution margin methods.

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Mostafizur Rahman
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10 views

Break Even Point Theory

CVP analysis examines changes in profits with changes in sales, costs, and prices. It helps management determine break-even points and sales volumes required for planned profits. Key assumptions are constant prices and costs, linear costs, and no inventory changes. Break-even point is where sales equal total expenses. Contribution margin is sales minus variable costs, used to cover fixed costs then calculate profits. Approaches to break-even analysis include graphical, equation, and contribution margin methods.

Uploaded by

Mostafizur Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1. What do you mean by CVP analysis?

Explain how CVP analysis helps management in


decision making.

Meaning of CVP Analysis:

Cost volume profit (CVP) analysis is a technique that examines changes in profits in response to
changes in sales, volumes, Costs and prices.

Cost- volume-profit analysis is a powerful tool that helps managers understands the relationships
of cost, volume and profit.

How CVP analysis helps management in-decision making:

CVP analysis helps management in decision making about future levels of operating activity by
answering the following questions:

√ What level of sales is necessary to at least cover all expenses?

√ How many volumes should be sold in order to earn a planned profit?

√ What will happen to profit if we change the selling prices?

√ How will changes in variable costs or fixed costs impact for planned profit?

√ What volume types should we produce and sale more to gain the maximum profit.

2. Discuss the underlying assumptions in the CVP analysis.

The underlying assumptions in the CVP analysis are discussed below:

(1) Selling price is constant. The price of a product or service will not change as volume
changes.
(2) Costs are linear and can be accurately divided into variable and fixed elements. The
variable element is constant per unit, and the fixed element is constant in total over the
entire relevant range.
(3) In multiproduct companies, the sales mix is constant.
(4) In manufacturing companies, inventories do not change. The number of units produced
equals the number of units sold.
(5) There is no change in the level of efficiency.
(6) There is no opening and closing stock.

3. Define breakeven point.

The level of sales at which profit is zero. The break-even point can also be defined as the point
where sales total equals total expenses or as the point where total contribution margin equals
total fixed expenses.

4. Define contribution margin and contribution margin ratio.

Contribution margin: Contribution margin is the amount of revenue remaining after deduction
variable cost from sales. Contribution margin is used first to cover the fixed expenses, and then
whatever remains goes toward profits. If the contribution margin is not sufficient to cover the
fixed expenses, then a loss occurs for the period.

Contribution Margin Ratio: Contribution margin ratio is commonly expressed as a percentage


of sales prices. It is one of the most important ratios for studying the profitability of operations of
a business and establishes the relationship between contribution and sales. A higher ratio means
a greater profitability and vice versa.
5. Name three approaches to break-even analysis.

Break-even analysis can be approached in three ways:

1. Graphical analysis
2. Equation method
3. Contribution margin method

Equation Method:
Profit = Sales – (Variable expenses + Fixed expenses)

OR

Sales = Variable expenses + Fixed expenses + Profit at the break-even point profit equal
to zero

Contribution Margin Method:

Break-even point in unit sold =

Break-even point in total sales Tk =

Break-even point (in Taka) =

Target Profit Analysis:


Suppose wind Com. Wants to know how many bikes must be sold to earn a profit of Tk
1, 00,000

CVP Equation:
Sales = Variable expenses + Fixed expenses + Profits

⇒ 500 Q = 300 Q + 80,000 + 1, 00,000

⇒ 200 Q = 1, 80,000

Q = 900 bikes.
The contribution Margin Approach

Unit sales to attain the target profit =

= 900 bikes.

6. Define Margin of Safety.

Margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales.

Margin of safety = Total budgeted (or actual) sales – Break even sales.

Margin of safety % =

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