Page 72 - DCOM206_COST_ACCOUNTING_II

Unit 4: Cost Volume Profit Analysis

Break-Even Point Notes

Break-even point is a point where the total sales or revenue are equal to total costs. In break-
even point, there is no profit or loss in the volume of sales. In other words, it is a point at which
no profit no loss situation prevails in the operating activity of a business firm. This indicates that
the break-even point is the minimum level of production at which total cost is recovered and no
profit or no loss is sustained.
According to Charles T. Horngren, “The break-even point is that point of activity (sales volume)
where total revenue and total expenses are equal; it is the point of zero profit and zero loss.”

According to G. R. Crowningsheild, “Break-even point is the point at which sales revenue
equals the cost to make and sell the product and no profit or loss is reported.”
The following fundamental formula is used to calculate break-even point:

Fixedcost  Sales Fixedcost
Break-even Point (in `) = OR =
Contribution P/Vratio
Fixedcost FC
Break-even Point (in units) = OR
Contribution perunit C per unit
Problem 4:
From the following particulars, calculate the break-even point:
Selling price ` 20 per unit

Variable cost ` 14 per unit
Fixed cost ` 60,000
Solution:

Fixedcost SPperunit
Break-even Point (in `) =
Contributionperunit
60,000 20 12,00,000

= 
6 6
= ` 2,00,000
Fixedcost
Break-even Point (in units) =
Contributionperunit
60,000
=
6
= 10,000 Units
Working note: (1) Calculation of contribution per unit:
Contribution = Selling price per unit – Variable cost per unit
Contribution = 20 – 14 = 6 per unit

Problem 5:
You are required to calculate the break-even point from the following information:
Selling price ` 30 per unit
Variable cost ` 20 per unit

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