Question

a) Breakeven point analysis is an important financial analysis tool used by business owners. i) Explain the importance of breakeven analysis. ii) What are its advantages and limitations?

b) Robert Industries produces a single product. The following are the financial numbers related to this product

Selling Price = $250 per unit

Variable cost = $100 per unit

Fixed Costs = $56,000

The Management wants to know the following :

1. Contribution per Unit

2. Contribution Margin ratio

3. Break even point in Units

4. Breakeven Point in sales

5. Calculate Sales value in $ to earn profit of $50,000

Answer 1

a. Importance & Advantages

Breakeven analysis is an important financial tool used by business owners because it gives you the required amount of earning which will help you reach at least the survival point of situation that is a situation of no profit or no loss. That is it is a level of sales where the contribution earned covers the fixed cost of the entity or to simply say total costs equal to total revenue.it helps the business determine the cost structures, and the number of units that need to be sold in order to cover the cost or make a profit. Break-even analysis is usually done as part of a business plan to see the how practical the business idea is, and whether or not it is worth pursuing. Even after a business has been set-up, break-even analysis can be immensely helpful in the pricing and promotion process, along with cost control.

Disadvantages

It assumes that sales price is constant at all levels of output which in real life is impractical. It assumes production and sales to be same. Break Even Charts might be time consuming to prepare. It can only apply to a single product or single mix of products.

b.

Selling Price per unit Variable Cost per unit Fixed Costs $250.00 $100.00 $56,000.00 1. Contribution per unit Selling Price per unit Less: Variable Cost per unit Contribution per unit $250.00 -$100.00 $150.00 2. Contribution Margin Ratio Contribution Margin Ratio = Contribution per unit / Selling Price per unit 100 = 150/250 * 100 = 60% 3. Break Even Point in units Break Even Point in units = Fixed Costs / Contribution per unit = $56000/$150 = 373.33 units

4. Break Even Point in sales Breakeven point in sales = Fixed Costs/Contribution Margin Ratio = $56000/60% = $93333.33 5. Sales Value in $ to earn a profit of $50000 Sales Value = Fixed Costs + Desired Profit / Contribution Margin Ratio = $56000 + $50000 / 60% =$176666.67