Page 224 - DMGT409Basic Financial Management

Unit 14: Break Even Analysis

7. According to Martz, Curry and Frank, a break even analysis indicates at what level cost Notes
and revenue are in ....................
8. The break even chart shows the .................... relationship of total costs to total revenue.
9. Break even analysis does not include adjustments for risk and ....................
10. The ratio or percentage of contribution margin to sales is known as ....................

State whether the following statements are true or false:
11. Break Even is the point where TR > TC.

12. Costs incurred for pilots’ salaries by a commercial airline can be classified as variable.
13. CVP analysis is useful in product decisions.
14. Break even analysis is a very generalised approach for dealing with a wide variety of
questions associated with profit planning and forecasting.

15. If the product mix consists of product with varying profi t margins, the picture presented
by a simple break even point may be meaningless.
14.9 Review Questions

1. What do you understand by the term ‘break even point’? Mention the types of problems
which an accountant can expect to solve with the help of such analysis.

You are required to calculate the break even point in the following case:
The fixed costs for the year are ` 80,000, variable cost per unit for the single product is

` 4.
Estimated sales for the period are valued at ` 2,00,000. The number of units involved
coincides with the expected volume of output. Each unit sells at ` 20.
2. From the following results of a company, determine by how much the value of sales must
be increased for the company to break even?

Net sales – ` 400000
Fixed Cost – ` 200000
Variable Cost – ` 240000
Use break even chart to illustrate this.

3. Golden Ltd. has annual fixed cost of ` 1,20,000. In the year 2005 sales amounted to ` 6,00,000

as compared with ` 4,50,000 in 2004 and the profit for 2005 was ` 50,000 higher than in 2004.
You are required to:
(i) Estimate profits for 2006 on forecast sales volume of ` 8,40,000 on the assumption

that this would not involve any addition to the company’s capacity; and
(ii) Calculate the break even sales volume (in rupees).

4. The following information are available from the cost records of a manufacturing
company:
Fixed expenses ` 4.000
Break even point ` 10,000

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