Lecture 1-2 BEP

Break-even & Limiting Factor
Analysis
AFZAL AHMED, FCA

FINANCE CONTROLLER
NAGAD
Breakeven analysis
Breakeven or CVP analysis is the study of

interrelationships between costs, volume and profit at
various levels of activity
Contribution = Sales revenue – Variable cost
Profit = Contribution – Fixed costs
BEP occurs when there is neither profit nor loss and so

fixed costs equal contribution
At BEP total contribution is enough to cover the fixed
costs.
Breakeven analysis
 Break even point

 Revenue = Cost
 p*x = v*x + FC
 p*x- v*x = FC
 x(p-v) = FC
 X = FC/(p-v)
 X= FC/contribution per unit
Breakeven analysis
Sample problem:
Expected Sales 10,000 units at CU 8 per unit
Variable costs CU 5 per unit
Fixed Costs CU 21,000
Requirements:
Compute the BEP
Breakeven chart
The Break-even
TC
point occurs where
.
Costs/Revenue TR VC total revenue
equals total costs –
the firm, in this
example would
have to sell Q1 to
generate sufficient
revenue (income)
to cover its total
BEP costs.
FC
Q1 Output/Sales
Breakeven chart
Costs/Revenue TR (p = £3) TR (p = £2) TC

. VC
BEP
BEP
FC
Q2 Q1
Output/Sales
Company should sell products at a higher price to reach BEP faster
Margin of Safety
Margin of safety refers to the sensitivity of the

forecasted or budgeted sales compared to the BEP
Margin of safety (units)= Budgeted sales volume less
Break-even sales volume
Margin of safety can be expressed as the difference
between the budgeted sales revenue and breakeven
sales revenue
Expressed as the percentage of the budgeted sales
revenue
Margin of safety represents the strength of the business.
Margin of Safety
TR (p = £3) TR (p = £2) TC
Costs/Revenue
. VC
Margin of Safety
FC
Q3 Q1 Q2 Output/Sales
Margin of Safety
Sample problem
ABC Co. makes and sales a product which has a
variable cost of CU 30 and which sells for CU 40.
Budgeted fixed costs and sales are CU 70,000 and
8,000 units
Requirements
Calculate the BEP and Margin of Safety
CVP Analysis
Sample problem
Butterfingers Company makes a product which has a
variable cost of CU7 per unit.
Requirements
If fixed costs are CU63,000 per annum, calculate the
selling price per unit if the company wishes to break
even with a sales volume of 12,000 units.
CVP Analysis
Sample problem
PQ Ltd makes a product which has a variable production cost of
CU8 and a variable selling cost of CU2 per unit. Fixed costs are
CU40,000 per annum, the sales price per unit is CU18, and the
current volume of output and sales is 6,000 units. The company is
considering whether to hire an improved machine for production.
Annual hire costs would be CU10,000 and it is expected that the
variable cost of production would fall to CU6 per unit.
Requirement
(a) Determine the number of units that must be produced and sold
to achieve the same profit as is currently earned, if the machine is
hired. (b) Calculate the annual profit with the machine if output
and sales remain at 6,000 units per annum.
Limiting Factor Analysis
A limiting factor is anything which limits the activity of an entity.

If a specific resource is a limiting factor, contribution will be
maximised by earning the highest possible contribution per unit of
limiting factor.
When there is a maximum potential sales demand for an
organization's products or services the contribution-maximising
decision is to produce the top-ranked products (or to provide the
top ranked services) up to the sales demand limit.
If there is a minimum demand for particular products or services,
the optimum plan must first take into account the minimum
requirements. The remaining resource must then be allocated
according to the ranking of contribution per unit of limiting factor.
Sample Problem
AB Ltd makes two products, the A and the B. Unit variable costs are as follows.
A (CU) B (CU)
Material 1 3
Labour (CU 9 / hour) 18 9
Overhead 1 1
20 13
The sales price per unit is CU26 per A and CU17 per B. During July 20X6 the
available labour is limited to 8,000 hours. Sales demand in July is expected to be
3,000 units for As and 5,000 units for Bs.
Requirement
Determine the profit-maximising production mix, assuming that monthly fixed costs
are CU20,000 and that no inventories are held.
Sample Problem
A company manufactures and sells three products, Beta, Delta and
Gamma. The unit selling price and cost structure of each product is
budgeted as follows.
Beta Delta Gamma
Selling Price 100 124 32
Variable Costs: Labour 24 48 6
Materials 26 4 8
Overhead 10 7 6
Total Variable Cost 60 60 20
The labour rate is budgeted at CU6 per hour, and fixed costs at
CU1,300,000 per annum. The company has a maximum production
capacity of 228,000 labour hours.
Market demand for the company's products will be as follows:

Beta 24,000 Units
Delta 12,000 Units
Gamma 60,000 Units
The board decided that a minimum of 10,000 units of each product

should be produced. The remaining production capacity would then
be allocated so as to achieve the maximum profit possible.
Requirement
Prepare a budget statement which clearly shows the maximum profit
which could be achieved in the year ending 30 September 20X2.
Sample Problem
A company has only 6,000 kg of an irreplaceable raw material “A” which
can be used to make three possible products X, Y & Z
X Y Z
Maximum demand (units) 4,000 3,000 5,000
Selling price per unit (Tk) 3.00 4.00 5.00
Variable cost per unit (Tk) 1.50 2.40 2.60
Fixed cost per unit (Tk) 1.80 2.20 2.40
Quantity of “A” required of make one unit of product (kg) 0.30 0.40 0.80
Required:
Calculate the profit maximizing production mix.
Make or buy & Limiting Factor Analysis
Sample Problem
TW manufactures two products, the D and the E, using the same material for each.
Annual demand for the D is 9,000 units, while demand for the E is 12,000 units.
The variable production cost per unit of the D is CU10, and that of the E CU15. The
D requires 3.5 kgs of raw material per unit, the E requires 8 kgs of raw material per
unit.
Supply of raw material will be limited to 87,500 kgs during the year. A sub
contractor has quoted prices of CU17 per unit for the D and CU25 per unit for the E
to supply the product. How many of each product should TW manufacture in order
to maximise profits?
Requirement
Determine the profit-maximising production mix, assuming that monthly fixed
costs are CU20,000 and that no inventories are held.
Limitations of BEP Analysis
BEP always is a supply side analysis; it only analyzes
the cost of the sales

It doesn’t analyses how demand may be affected at
different price level

It assumes Fixed Cost is constant
It assumes quantity of goods produced is equal to the
quantity of goods sold

Thank you

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Break-even & Limiting Factor

AFZAL AHMED, FCA

Breakeven or CVP analysis is the study of

Profit = Contribution – Fixed costs

BEP occurs when there is neither profit nor loss and so

 Break even point

Costs/Revenue TR (p = £3) TR (p = £2) TC

Margin of safety refers to the sensitivity of the

A limiting factor is anything which limits the activity of an entity.

Market demand for the company's products will be as follows:

The board decided that a minimum of 10,000 units of each product

Maximum demand (units) 4,000 3,000 5,000

Selling price per unit (Tk) 3.00 4.00 5.00

Variable cost per unit (Tk) 1.50 2.40 2.60

Fixed cost per unit (Tk) 1.80 2.20 2.40

BEP always is a supply side analysis; it only analyzes

the cost of the sales

different price level

It assumes quantity of goods produced is equal to the

quantity of goods sold

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