(Week 11)

(Week 11)

• 2.
  Break Even Analysis MUHAMMADIRFAN Assistant Professor, Sarhad University, Peshawar.
• 3.
  BREAK EVEN ANALYSIS… Examines the short run relationship between changes in volume and changes in total sales revenue, expenses and net profit  Also known as C-V-P analysis (Cost Volume Profit Analysis)
• 4.
  USES OF BREAKEVEN ANALYSIS  An important tool in terms of short-term planning and decision making  It looks at the relationship between costs, revenue, output levels and profit  Short run decisions where C-V-P is used include choice of sales mix, pricing policy etc.
• 5.
  DECISION MAKING ANDBREAKEVEN ANALYSIS  How many units must be sold to breakeven?  How many units must be sold to achieve a target profit?  Should a special order be accepted?  How will profits be affected if we introduce a new product or service?
• 6.
  KEY TERMINOLOGY  Breakeven:  Contribution per:  Margin of safety:  Marginal Cost:
• 7.
  BREAKEVEN FORMULA: Fixed Costs *Contributionper unit *Contribution per unit = Selling Price per unit – Variable Cost per unit
• 8.
  BREAKEVEN CHART:
• 9.
  EXAMPLE 1 Using thefollowing data, calculate the breakeven point and margin of safety in units:  Selling Price = €50  Variable Cost = €40  Fixed Cost = €70,000  Budgeted Sales = 7,500 units
• 10.
  EXAMPLE 1: SOLUTION Contribution = €50 - €40 = €10 per unit  Breakeven point = €70,000/€10 = 7,000 units  Margin of safety = 7500 – 7000 = 500 units
• 11.
  EXAMPLE: 2 Using thefollowing data, calculate the level of sales required to generate a profit of €10,000:  Selling Price = €35  Variable Cost = €20  Fixed Costs = €50,000
• 12.
  EXAMPLE 2: SOLUTION Contribution = €35 – €20 = €15  Level of sales required to generate profit of €10,000: €50,000 + €10,000 €15 4000 units
• 13.
  Thank You…