Cost Volume Profit – Breakeven Analysis

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Cost-Volume-Profit analysis is used in the planning process by looking at the effects caused by varying levels of units sold, unit pricing, fixed costs and variable costs on bottom line profit. The primary objective from a managerial perspective is to maximize contribution margin (revenue less variable costs) and minimize fixed costs. In the process of planning, key stakeholders within an organization are likely to ask some very important questions such as “What’s the effect on profit if units sold decreased 3%?” “How much of an impact will a 10% price hike have on profit?” or “what’s the impact to the bottom line if variable cost per unit increased 8%?”

On the way to answering those questions or as part of a separate exercise, there will surely be a need to figure out what the breakeven point is. Here are the steps to determining the breakeven point from the perspective of both units and dollars. So go ahead and grab yourself an income statement or follow the simple example presented below.

Information Extracted From John Doe Company Income Statement for August 2009

(*Reformatted to calculate Contribution Margin*)

                Revenue @ 500 units                     $50,000

Less: Variable Costs                            8,000

Contribution Margin                         42,000

Less: Fixed Costs                                21,000

Net Income                                         $21,000

Breakeven Analysis in Terms of Units:

  • Calculate price per unit
    • Price per unit = Revenue / Total Units = $50,000 / 500 = $100
  • Calculate variable cost per unit
    • Variable cost per unit = Variable Costs / Total Units = $8,000/500 = $16
  • Calculate contribution per unit
    • Contribution per unit = Price Per Unit – Variable Cost Per unit = $100 – 16 = $84

OR

Contribution per unit = Contribution Margin / Total Units = $42,000/500 = $84

Calculate Breakeven Point in units

  • Breakeven units = Fixed Costs / Contribution Per Unit = $21,000/$84 = 250 units

Perform a sanity check :

  • @250 Units
  • Revenue = 250 * $100 = $25,000
  • Less: Variable costs = 250 * $16 = $4,000
  • Contribution Margin = $25,000 – $4,000 = $21,000
  • Less: Fixed Costs = $21,000
  • Net Income = Contribution Margin – Fixed Costs = $21,000 – $21,000 = $0

Breakeven Analysis in Terms of Dollars

Calculate Variable Cost %

  • Variable Cost % = (Variable Cost / Revenue) x 100% = ($8,000/$50,000) x 100% = 16%

Calculate Contribution %

  • Contribution % = (Contribution Margin/Revenue) x 100% = ($42,000/$50,000) x 100% = 84%

Calculate Breakeven point in $

  • Breakeven dollars = Fixed costs / Contribution % = $21,000 / 84% = $25,000

Perform a sanity check:

  • Revenue =$25,000
  • Less: Variable Costs = Variable Cost % x Revenue = 16% x $25,000 = $4,000
  • Contribution Margin = Contribution % x Revenue = 84% x $25,000 = $21,000
  • Less: Fixed Costs = $21,000
  • Net Income = Contribution Margin – Fixed Costs = $0

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