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 €10 per unit with a variable cost of €4 per unit. Fixed costs are €30 000 per month. How many units Q must be sold per month to make a profit of €6 000?
F = €30 000p = €10v = €4profit = €6 000
Q = units
2.Break-even analysisHard
A product sells for €16 per unit, with a variable cost of €8 per unit and fixed costs of €20 000 per year. Budgeted sales are 2 880 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €20 000p = €16v = €8budget = 2 880
MS = %
3.Financial accountingMedium
Which inventory valuation method assumes the oldest goods are sold first?
- ALIFO (last in, first out)
- BWeighted average cost
- CFIFO (first in, first out)
- DSpecific identification of each item
4.Financial accountingHard
A company issues shares at €5 each with a nominal value of €1. The extra €4 per share is recorded as:
- AA liability
- BRetained earnings
- CRevenue
- DShare premium
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 = 10 − 4 = €6
Units for the target profit
Q = (F + profit)/(p − v) = (30 000 + 6 000)/6 = 6 000
Answer
Q = 6 000 units
2.Break-even analysis
Answer: MS = 13.19 %
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) = 20 000/8 = 2 500
Margin of safety
MS = (2 880 − 2 500)/2 880·100 = 13.19%
Answer
MS = 13.19%
3.Financial accounting
Answer: C · FIFO (first in, first out)
Why this is the answer
Under FIFO, cost of sales uses the oldest costs and closing inventory reflects recent costs. IFRS does not allow LIFO.
Answer
C · FIFO (first in, first out)
4.Financial accounting
Answer: D · Share premium
Why this is the answer
The amount above nominal value goes to the share premium account in equity; issuing shares is a financing transaction, not income.
Answer
D · Share premium
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