Breakeven Analysis: Determining Profitability of a Company

This presentation explains how to determine the profitability of a company using breakeven analysis. It covers the formula, fixed and variable costs, and contribution margin. It also provides examples of breakeven analysis and its limitations. The presentation concludes with action items and references.

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Executive Summary
This is presentation in relation to company breakeven analysis. It will help to analyze how the
company will determine the profitability. The breakeven could be analyzed by breaking cost in
to two parts. I,e fixed cost and varibale cost.
The break even is point where there is no profit and no loss. In this report, we had considered
several example to analyze the break even point by making changes in the variable cost and
fixed cost.
The contribution analysis is also veiwed in this report. It will help to determine effect of
chages in contrbution of the break even point.

Analysis:
It is such point where there is no profit or no loss. Every organization is required to determine
breakeven point to analyze the variable cost and fixed cost.
The formula used to determine the break even point is as follows:
1. Break-even Point : Cost incurred in nature of fixed
sales minus variable costContribution
Margin
2. Break-even Point: Cost incurred in nature of fixed
P/V Ratio

Analysis:
Fixed cost:
Fixed cost are thos cost incurred in relation to goods or service which will not change as
change in activity. The cost will remain same irrespective of change in activity. Examples:
Depreciation on equipment, Rent on Buildings etc.
Variable Cost:
Varibale cost are those cost which will change as change in quantity or activity in relation to
goods and service. Examples: Commission on sales, Marketing Expenses etc.

Solution:
Solution of Question No:1
Fixed cost = $,56,70,000
Sales = $ 15,000,000
Variable cost =$97,50,000
Contribtuion Margin=$52,50,000
Here , contribution margin is 35% of
revenue.
Accordingly Break even =
$56,70,000/ 35%
i,e $16,200,000
Solution of Question No:2
Fixed cost = $,56,70,000
Option-1, if variable cost is 70%:
It means company have 30%
contribution margin.
The breakeven will be as follows:
Breakeven = $56,70,000/ 30%
i,e $ 87,23,027
Option-2, if variable cost is 60%:
It means company have 40%
contribution margin.
The breakeven will be as follows:
Breakeven = $56,70,000/ 40%
i,e $ 12,60,000

Solution:
Solution of Question No:3
The operating income at different variable cost :
Particulars Variable cost @70% Variable Cost@60%
Sales 15,000,000 15,000,000
Variable cost 10,500,000 90,00,000
Fixed Cost 56,70,000 56,70,000
Operating Income -11,70,000 330,000

Solution:
Solution of Question no.4
As per ethical standards issued by the institute of management, every management accountant
should follow the following discipline:He should competent to perform his duties following
rules regulation and professional technical standards issued by the government or any
regulatory body from time to time.He should maintain confidentiality and should disclose any
material information unless required by law or regulation except the consent of the client.He
must consider present reports to stakeholders in a timely and fair manner. He should disclose
all weaknesses and any material information to the best of his knowledge. The material
information is that information which will affect the decision of stakeholders.He should be
integrity and maintain objectivity. The report issued by the management accountant should not
be based on the influence of another person.Accordingly, Martin should be required to
discuss with Samuel and advise him to disclose environment cost liabilities as contingent
liability.
Solution of Question no.5
In case such liabilities are not disclosed, the Laurie Manufacturing company will incur a huge
loss in the future at a point in time. Due to which, the company will not survive for further or
may result in the liquidation of the company.

Findings:
•It helps to analyze the
sales and cost of
products and services in
relation to volume of
sales in business unit als
helps to determine the
point where cost is equal
to sales value of
company.
•It is found that
company will earn more
income in case where
there is more
contribution margin or
less variable cost and
vice versa.
This picture will help to
analyze the breakeven
point:

Action items/limitations
It is suggested to company to manage variable cost. The variable cost must be less so that
company can increase its contribution. As contribution margin increases break even
point will decreases. It means company will gain more income.
The limitation of the breakeven analysis:
1. 1. There may circumstances where it is difficult to analyse the variable
and fixed cost.
2. It doesnot consider changes in price technology and efficiency.
3. It does not suit for different type of product at the same time.
4. The breakeven analysed only after there is changed in cost and sales
function. et al.(2013).

References:
Choudhary et al.(2013).' Break-Even Analysis in Healthcare Setup’ JRFHHA , Investopedia.
Available at: https://www.researchgate.net › publication › 274677779_Break-Even_Analysis [
Accessed: 10 January 2013]. DOI: 10.5005/jp-journals-10035-1006
R Sutardjo Tui , ini Novrianti, Anas .Aryanti Virtanti & Nur Fitriani (2017).’ BREAKEVEN POINT
AND INCREMENTAL ANALYSIS IN DECISION MAKING OF LEASE-PURCHASE OPTION OF HEAVY
EQUIPMENT AT NICKEL LATERITIC ORE MINING, ARPN Journal of Engineering and Applied
Sciences. Volume 12 (13), pp. 113-114. Available at:
http://www.arpnjournals.org/jeas/research_papers/rp_2017/jeas_0717_6173.pdf [Accessed:
13 July 2017]