Page 268 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 12: Marginal Costing and Profit Planning

4. Data needed for the analysis is generally kept secret by the companies – otherwise it can Notes
indicate their profit margins per unit.

12.5.4 Application of Break-even Analysis

Break even analysis is a very generalised approach for dealing with a wide variety of questions
associated with profit planning and forecasting. Some of the important practical applications of
break even analysis are:
1. What happens to overall profitability when a new product is introduced?

2. What level of sales is needed to cover all costs and earn, say, 1,00,000 profit or a 12% rate
of return?
3. What happens to revenues and costs if the price of one of a company’s product is hanged?

4. What happens to overall profitability if a company purchases new capital equipment or
incurs higher or lower fixed or variable costs?
5. Between two alternative investments, which one offers the greater margin of profit (safety)?

6. What are the revenue and cost implications of changing the process of production?
7. Should one make, buy or lease capital equipment?

Example: From the following information relating to quick standards Ltd., you are
required to find out (i) PV ratio (ii) break even point (iii) margin of safety (iv) calculate the
volume of sales to earn profit of 6,000/-
Total Fixed Costs 4,500
Total Variable Cost 7,500

Total Sales 15,000
Solution:
First step to find out the Contribution volume
Sales 15,000

Variable Cost 7,500
Contribution 7,500
Fixed Cost 4,500

Profit 3,000

1. Second step to determine the PV ratio
Contribution 7,500
PV ratio = 100 100 50%
Sales 15,000
Third step to find out the Break even sales
Fixed cost 4,500
2. Break even sales = 9,000
PV ratio 50%

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