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 €12 per unit with a variable cost of €4 per unit. Fixed costs are €32 000 per month. How many units Q must be sold per month to make a profit of €12 000?
F = €32 000p = €12v = €4profit = €12 000
Q = units
2.Break-even analysisHard
A company sells 3 000 units per month at €24 each, with a variable cost of €12 per unit and fixed costs of €24 000 per month. The variable cost rises by €3 per unit and the price stays the same. How many units Q must now be sold per month to keep the same profit?
Q = 3 000p = €24v = €12 → €15F = €24 000
Q = units
3.Financial accountingMedium
Which inventory valuation method assumes the oldest goods are sold first?
- AWeighted average cost
- BSpecific identification of each item
- CLIFO (last in, first out)
- DFIFO (first in, first out)
4.Financial accountingHard
In the indirect method of the cash flow statement, depreciation is:
- AIgnored completely
- BShown in financing activities
- CSubtracted from net profit
- DAdded back to net profit because it is a non-cash expense
3Solutions
1.Break-even analysis
Answer: Q = 5500 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 = 12 − 4 = €8
Units for the target profit
Q = (F + profit)/(p − v) = (32 000 + 12 000)/8 = 5 500
Answer
Q = 5 500 units
2.Break-even analysis
Answer: Q = 4000 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).
Current profit
Π = 3 000·(24 − 12) − 24 000 = €12 000
New contribution margin per unit
24 − 15 = €9
Units for the same profit
Q = (24 000 + 12 000)/9 = 4 000
Answer
Q = 4 000 units
3.Financial accounting
Answer: D · 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
D · FIFO (first in, first out)
4.Financial accounting
Answer: D · 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
D · Added back to net profit because it is a non-cash expense
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