Page 230 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 11: Marginal Costing and Profi t Planning

11.4 Break-even Point Notes

Break-even analysis examines the relationship between the total revenue, total costs and total

profits of the firm at various levels of output. It is used to determine the sales volume required for
the firm to break-even and the total profits and losses at other sales level. Break-even analysis is a

method, as said by Dominick Salnatore, of revenue and total cost functions of the fi rm. According
to Martz, Curry and Frank, a break-even analysis indicates at what level cost and revenue are in
equilibrium.
In case of break-even analysis, the break-even point is of particular importance. Break-even point
is that volume of sales where the firm breaks even i.e., the total costs equal total revenue. It is,

therefore, a point where losses cease to occur while profits have not yet begun. That is, it is the
point of zero profi t.
The following are the key methods of computing BEP:

Break-even Point in Units
Fixed Costs
BEP =
Selling price – Variable costs per unit

`
Fixed Costs 10,000
For Example, =
Selling price 5 per unit – Variable costs 3 per unit
`
`
` 10,000
Therefore, BEP = = 5,000 units.
5 3
–
The conclusion that can be drawn from the above example is that sales volume of 5000 units will
be the accurate point at which the manufacturing unit would not make any loss or profi t.
Break-even Point (Sales Volume `)

Break-even point in sales can be found out by two methods.
1. Selling Price Method
2. PV Ratio Method
1. Selling Price Method: Under this method Break-even sales volume in rupees is found out
through the product of Break-even Point in units and selling price per unit.
BEP (`) = Break-even Point (units) Selling price per unit
2. PV Ratio Method: Under this method, break-even sales volume in rupees can be determined
through the following ratio

Fixed Cost
BEP (`) =
PV ratio
Sales − Variable cost Contribution
where PV Ratio = =
Sales Sales

Example: Calculate Break-even point `

Sales 6,00,000
Fixed Cost 1,50,000

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