Break-even analysis
- Contribution margin
- CM = p − v
- Break-even quantity
- QBE = FC/(p − v)
- Target profit
- Q = (FC + profit)/(p − v)
- Profit
- π = (p − v)·Q − FC
- Margin of safety
- (Q − QBE)/Q
Management Accounting: cram pack
Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Break-even analysisMedium
A product sells for €24 per unit with a variable cost of €18 per unit. Fixed costs are €24 000 per month. How many units Q must be sold per month to make a profit of €12 000?
F = €24 000p = €24v = €18profit = €12 000
Q = units
2.Break-even analysisHard
A product sells for €45 per unit, with a variable cost of €30 per unit and fixed costs of €15 000 per year. Budgeted sales are 1 150 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €15 000p = €45v = €30budget = 1 150
MS = %
3.Financial accountingMedium
Net working capital is:
- ACurrent assets minus current liabilities
- BTotal assets minus total liabilities
- CRevenue minus operating expenses
- DNon-current assets minus long-term loans
4.Financial accountingHard
In the indirect method of the cash flow statement, depreciation is:
- ASubtracted from net profit
- BAdded back to net profit because it is a non-cash expense
- CShown in financing activities
- DIgnored completely
3Solutions
1.Break-even analysis
Answer: Q = 6000 units
Cost-volume-profit: each unit sold earns a contribution margin, price minus variable cost per unit. Profit = Q·(p − v) − F, where F is the fixed cost. At the break-even point profit is zero, so Q = F/(p − v).
Contribution margin per unit
p − v = 24 − 18 = €6
Units for the target profit
Q = (F + profit)/(p − v) = (24 000 + 12 000)/6 = 6 000
Answer
Q = 6 000 units
2.Break-even analysis
Answer: MS = 13.04 %
Cost-volume-profit: each unit sold earns a contribution margin, price minus variable cost per unit. Profit = Q·(p − v) − F, where F is the fixed cost. At the break-even point profit is zero, so Q = F/(p − v).
Break-even quantity
Q = F/(p − v) = 15 000/15 = 1 000
Margin of safety
MS = (1 150 − 1 000)/1 150·100 = 13.04%
Answer
MS = 13.04%
3.Financial accounting
Answer: A · Current assets minus current liabilities
Why this is the answer
Working capital measures the short-term resources available for daily operations: inventory, receivables and cash minus short-term obligations.
Answer
A · Current assets minus current liabilities
4.Financial accounting
Answer: B · Added back to net profit because it is a non-cash expense
Why this is the answer
Starting from profit, non-cash charges like depreciation are added back, and changes in working capital are adjusted.
Answer
B · Added back to net profit because it is a non-cash expense
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