MANAGEMENT ACCOUNTING - Topic: Break – Even – Analysis

MANAGEMENT ACCOUNTING

Topic: Break – Even – Analysis

I repeated this post because of some of the figure are not properly aligned. So, I have to put them in table. 

 

For: Questions and answers, email: theotherwomaninmarriage@gmail.com

B.E.A is a technique used for decision making in the short run.  It establishes  the relationship between cost volume and profit.  It is also known as cost, volume, profit analysis.

It shows the point at which the total cost of an organization equate the total revenue.  That is BE=TC=TR.

ASSUMPTIONS OF B.E.A

1.    It is assumed that there is no opening stock

2.    It is assumed that there is no closing stock

3.    It is assumed that unit selling price is constant

4.    It is assumed that variable cost will always varies

5.    It is assumed that company produce a single output

6.    It is assumed that fixed cost will always remain fixed

7.    It is assumed that there is no changes in the level of technology

LIMITATIONS OF B.E.A

(1) Wrong assumption of no opening stock

(2) Wrong assumption of no closing stock

(3) Wrong assumption of constant selling price

(4) Wrong assumption of fixed cost etc.

Application of B.E.A

1.    Break Even Point in Naira or Value - (this is the same – either value or Naira).            Fixed cost

                       Contribution/margin ration

Note: Contribution margin ration = Profit volume ration

                                Contribution/Sales

2.    Break Even Point in Unit

                                                Fixed Cost

                                      Contribution/unit

3.    Break Even Point in Unit + Desired Profit

B.E.P in unit + Desired Profit

    Contribution per unit

4.    B.E.P in value + Desired profit

Fixed cost + Desired profit

  CMR

          Note that desired profit = profit before Tax

                                                          Profit before Tax = Profit After tax

                                                                                               (1-Tax rate)

5.    Margin of Safely

= Actual Sales – Sales at Break Even Point

Here is the solution to the assignment on page 127

For the benefit of those that are yet to buy the material, here is the question:  But pls, try and get your material.

Question One: Dachin and Ogala Plc is a company located in Benue State.  The firm produces three products with the following cost and demand data.

 

Product:-	Emma	Raphael	Godwin
CMR%	20	25	30
Max Sales Min Sales	N’000 1, 600 200	N’000 2,000       200	N’000 3,000 200

There are fixed cost of N1,400,000 per period.  As a student of management accounting, the directors of Dachin and Ogala Plc have approached you to generate computations for the lowest break even sales value per period subject to meeting the minimum sales value. 

Solution to Question One:

DACHINE AND OGALA PLC

Computation of Break Even Point in Value subject to meeting the minimum sal3es value

Break Even Point in Value:

=           Fixed Cost

Contribution Margin Ratio  

Fixed cost = N1,400,000                         

Note: We have to compute each CMR and we start by Emma.

Emma (CMR of 20%) = Contribution

                                              Sales

                     = 20% =      Contribution

                                             200,000

Cross multiply and you will get 0.20 x 200,000 = 40,000

Emma Contribution is 40,000

 

FOR RAPHAEL:

CMR = 25%

 (CMR of 25%) =             Contribution

                                              Sales

                     = 25% =      Contribution

                                             200,000

Cross multiply and you will get 0.25 x 200,000 = 50,000

Raphael Contribution is 50,000.

FOR GODWIN:

 (CMR of 30%)           = Contribution

                                              Sales

                     = 30% =      Contribution

                                             200,000

Cross multiply and you will get 0.30 x 200,000 = 60,000

Godwin Contribution is 60,000.

Note that there minimum sales is 200,000 each. It is only the % of their CMR that varies.  You can read the question again for clarification.

Now here is the Total Contribution Margin Ratio for all

 40,000 + 50,000+ 60,000

200,000+200,000+200,000

=0.25

I hope we all know where I got the above figures.  If we don’t, remember, that Emma CMR is 40,000, Raphael, 50,000 and Godwin 60,000. That is the upper figures while below, from the question, each of them have 200,000 each as their minimum sales.

 

So, B.E.P in Value =                         N1,400,000

                                                               0.25

                                     

                B.E.P in Value                 = N5,600,000

That is it.

But we can still add jara to the answer by doing the following:

Emma 20% x N5,600,000     =        N1,120,000

Raphael 25% x N5,600,000 =        N1,400,000

Godwin 30% x N5,600,00    =        N1,680,000.

You all know this guys they use in this question, Godwin will always want the lion share and he got it hehehe.

Note that this is just one of the assignment questions. We still have question 2 and 3 which will be posted ASAP.

Thank you all.

Israel Onoriode Ugbo

Your Administrator