Page 125 - DMGT304_EVENT_MANAGEMENT

Event Management

Notes = Change in Profit/Change in Sales
P/V ratio is an indicator of the rate at which profit is being earned. A high P/V ratio indicates
high profitability and a low ratio indicates low profitability in the business.

5.5.3 Methods of Break-even Analysis

Break-even analysis can be performed by two methods:
1. Algebraic Method
2. Graphic Method

Algebraic Method

This method involves the use of formula or hit and trial methods.
To find break-even quantity, the event manager uses the standard profit equation, where profit
is the difference between total revenues and total costs. Predetermining the profit to be ` 0, he
then solves for the quantity that makes this equation true, as follows:

Let TR = Total revenues
TC = Total costs
P = Selling price
F = Fixed costs
V = Variable costs

Q = Quantity of output
TR = P× Q
TC = F + V × Q

TR – TC = profit
Because there is no profit (` 0) at the break-even point,
TR – TC = 0, and then P × Q – (F + V × Q) = 0.
Finally, Q = F (P – V).
This is typically known as the contribution margin model, as it defines the break-even quantity
(Q) as the number of times the company must generate the unit contribution margin (P ” V), or
selling price minus variable costs, to cover the fixed costs. It is particularly interesting to note
that the higher the fixed cost, the higher is the break-even point. Thus, companies with large
investments in equipment and/or high administrative-line ratios may require greater sales to
break even.
Total Contribution = Total Fixed Costs
Unit Contribution × Number of Units = Total Fixed Costs

Total Fixed Costs
Number of Units =
Unit Contribution

Fixed Costs
Break-even(in Sales) =
C/P

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