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 €18 per unit with a variable cost of €8 per unit. Fixed costs are €50 000 per month. How many units Q must be sold per month to make a profit of €6 000?
F = €50 000p = €18v = €8profit = €6 000
Q = units
2.Break-even analysisHard
A product sells for €24 per unit, with a variable cost of €12 per unit and fixed costs of €24 000 per year. Budgeted sales are 3 000 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €24 000p = €24v = €12budget = 3 000
MS = %
3.Financial accountingMedium
Current assets are €300,000 and current liabilities are €150,000. What is the current ratio?
- A2.0
- B4.5
- C0.5
- D1.5
4.Financial accountingHard
An increase in accounts receivable during the year, in the indirect cash flow method, is:
- ASubtracted from profit to get operating cash flow
- BShown as an investing outflow
- CNot relevant to cash flow
- DAdded to profit
3Solutions
1.Break-even analysis
Answer: Q = 5600 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 = 18 − 8 = €10
Units for the target profit
Q = (F + profit)/(p − v) = (50 000 + 6 000)/10 = 5 600
Answer
Q = 5 600 units
2.Break-even analysis
Answer: MS = 33.33 %
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) = 24 000/12 = 2 000
Margin of safety
MS = (3 000 − 2 000)/3 000·100 = 33.33%
Answer
MS = 33.33%
3.Financial accounting
Answer: A · 2.0
Why this is the answer
€300,000 ÷ €150,000 = 2.0, so current assets cover short-term obligations twice.
Answer
A · 2.0
4.Financial accounting
Answer: A · Subtracted from profit to get operating cash flow
Why this is the answer
Higher receivables mean some revenue was not received in cash, so the increase is deducted.
Answer
A · Subtracted from profit to get operating cash flow
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