Page 265 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 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 profit.

12.5.1 Break Even Point in Units

Assume the selling price is 20/-per unit, variable cost per unit 10/-and the fixed cost 1000/-
Find out the break-even point.

Sales 20/-
Variable Cost 10/-

Contribution 10/-
Fixed Cost 1000/-
Profit (-) 990/-

If the firm produces only one unit, the amount of loss is 990/-. To avoid the amount of loss,
how many units are to be produced ?
As already highlighted, BEP is the point at which the firm neither earns profit nor incurs loss.

Profit/Loss is a resultant out of contribution while meeting the fixed cost volume of the
transaction. From the above example, the contribution per unit is 10/, which is not sufficient
to meet the fixed cost volume of 1000. The purpose of finding out the BEP in units is to identify
the level of contribution which is not only equivalent as well as to meet fixed cost of the
transaction, but also to avoid loss. To raise the volume of contribution at par with the fixed cost
volume, fixed cost has to be related to the contribution margin per unit through the ratio given
below:

Fixed cost =“X” units × Contribution Margin Per Unit
“X” units can be found out from the following

Fixed Cost
“X” units =
Contribution Margin Per Unit

The total number of units “X” which equate the contribution volume of “X” units with the total
fixed cost is the Break Even Point (Units).

Fixed Cost
Break Even Point (Units)
Contribution Margin Per Unit
1000
100 Units
10
The above illustration reveals that how many number of times the contribution margin per unit
should be equivalent to the total fixed cost volume. Hence the number of times is nothing but
the units required to have equivalent volume of contribution to the tune of fixed cost.

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