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 €26 per unit with a variable cost of €6 per unit. Fixed costs are €10 000 per month. How many units Q must be sold per month to make a profit of €5 000?
F = €10 000p = €26v = €6profit = €5 000
Q = units
2.Break-even analysisHard
A product sells for €28 per unit, with a variable cost of €18 per unit and fixed costs of €8 000 per year. Budgeted sales are 1 040 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €8 000p = €28v = €18budget = 1 040
MS = %
3.Financial accountingMedium
Which depreciation method charges the same amount every year?
- ASum-of-the-years'-digits
- BReducing balance
- CUnits of production
- DStraight-line
4.Financial accountingHard
Goodwill arises in a business combination when:
- AA company has a good reputation
- BThe acquired company makes a loss
- CAssets are revalued upwards
- DThe consideration paid exceeds the fair value of identifiable net assets acquired
3Solutions
1.Break-even analysis
Answer: Q = 750 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 = 26 − 6 = €20
Units for the target profit
Q = (F + profit)/(p − v) = (10 000 + 5 000)/20 = 750
Answer
Q = 750 units
2.Break-even analysis
Answer: MS = 23.08 %
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) = 8 000/10 = 800
Margin of safety
MS = (1 040 − 800)/1 040·100 = 23.08%
Answer
MS = 23.08%
3.Financial accounting
Answer: D · Straight-line
Why this is the answer
Straight-line spreads the depreciable amount evenly. Reducing balance charges more in early years; units of production follows actual use.
Answer
D · Straight-line
4.Financial accounting
Answer: D · The consideration paid exceeds the fair value of identifiable net assets acquired
Why this is the answer
Goodwill = consideration − fair value of identifiable net assets. Under IFRS it is not amortised but tested for impairment annually.
Answer
D · The consideration paid exceeds the fair value of identifiable net assets acquired
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