Break-Even Analysis

Question 1

Cost-Volume-Profit Analysis (CVP) = Break-even Analysis (Single product case)

Answer 1

Break-even analyses provide information about revenue, costs, profit and loss for alternative levels of units
produced and sold. Identifies the point at which revenue received equals the costs associated with
receiving the revenue = break-even point.

Question 2

GMAT (Graduate Management Admission Test)

Answer 2

1. Identify problems and
   uncertainties
2. Obtain information
3. Make predictions about the
   future
4. Make decisions by choosing
   among alternatives
5. Implement decisions, evaluate
   performance and learn

CVP helps to prevent decisions that contribute to operating loss instead of operating income

Question 3

Breakeven Point (BEP) for Quantity

Answer 3

Quantity of output sold at which total revenue = total cost (profit = 0)
Cf/(p-cv)

Question 4

Sensitivity analysis

Answer 4

„What-if“ technique that managers use to examine how an outcome will change if the original predicted
data are not achieved or if an underlying assumption changes.

Quantity of units required to be sold = (Fixed cost + Target Operating Income) : CM per Unit

Question 5

Formulas

Answer 5

CM = R- Cv
CM % = CM per Unit : p
CM = CM% * R
CM per Unit = p- cv
Operating Income = CM - Cf
Quantity of units required to be sold = (Fixed cost + Target Operating Income) : CM per Unit
Target Net Income = Target Operating Income - (Target Operating Income * Tax Rate)
Target Operating Income = Target Net Income : (1- Tax Rate)

Question 6

Break-even Analysis (Multiple product case)

Answer 6

Focus on several products with different sales volumes in an integrated break-even analysis. Calculation of
break-even revenue instead of break even sales volume. Always 2 BEP instead of 1

Global fixed cost treatment (only company fixed cost)
Differentiated fixed cost treatment (Company fixed cost and fixed cost of individual products)

Question 7

BEP when decline in revenue affects all products proportionally

Answer 7

BEP = Cf / (1- (Total Variable Cost / Total Revenue))

Question 8

BEP when decline in revenue affects first only the last product (product A), then the second last
product (product B) etc.

Answer 8

a + c/b * d

Cum Rev + Interin Profit / Interin Loss * Revenue