Page 273 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes TFC
=
AVC . Q
1— B
P . Q
B
TFC
S = …(2)
B
1 – TVC
TR
or

TVC
Where S is the break-even sales level. The denominator, 1 – , provides a measure
B
TR
of the contribution made by the product to recover fixed costs. For example, the break
even level in rupee sales is :
2,00,000
S = = 2,50,000
B
1 – 20
100
which is the same result that can be obtained by multiplying the break even quantity by
unit price. In equation (1) the contribution margin is calculated on a per unit basis from the
ratio of AVC to price. In equation (2) the contribution margin is calculated on a total sales
revenue basis from the ratio of TVC to TR. The ratio is the same in each case and in both the
situations the calculated ratio is subtracted from the equation, Q (P – AVC) = TVC, to
B
yield the percentage of revenue that contributes to recovery of fixed costs or overheads.
3. In order to determine the break even point in terms of percentage utilisation of plant
capacity (% B), (or load factor to be achieved) the equation:

TFC TFC
Q = = has
B
(P – AVC) ACM
to be modified as
TFC
% B = 100
(P – AVC) Q(cap)
where, Q (cap) is the maximum capacity of the plant expressed in units of output.

2,00,000
% B = 100
( 100 – 20) 20,000
= 12.5%, which indicates that the firm can break even by using only 12.5% of its capacity.

Example: Indian Airlines has a capacity to carry a maximum of 10,000 passengers per
month from Kolkata to Guwahati at a fare of 500. Variable costs are 100 per passenger, and
fixed costs are 3,00,000 per month. How many passengers should be carried per month to
break even? What load factor (i.e., average percentage of seating capacity filled) must be reached
to break even?

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