Breakeven Analysis

Breakeven Analysis

2

1. Breakeven analysis is calculated to determine the minimum sales that an
   Organization must meet to cover all the expenses and commence in making a profit
   (Cafferky & Wentworth, 2010). In our case, where; Unit variable cost= £30, Fixed
   Cost=£250,000, Sales= 50,000.
   Solution
   Total Variable cost= Unit Variable CostSales =£3050,000=1,500,000
   Total Cost= Total Variable Cost + Fixed Cost=£1,500,000+£250,000=1750000
   Breakeven point= Total Cost/ Unit sales
   Therefore, the breakeven selling price is= Total Cost/ Sales
   = 1750000/250000 = £7 per unit
   If the planned selling price is £48 per unit, then;
   Solution
   Breakeven Sales Units = 250000/ (48-30) = 13,889
   Budgeted Sales Units = 50000
   Margin Safety = (50000-13889)/50000=0.72222*100
   Therefore, the margin safety is 72.22%
2. The following information is about two organizations, A and B.
   • Which firm has higher operating gearing?

3

According to Alhabeeb (2012) Operating Gearing can be arrived using the following the
formula {[quantity* (Price- Variable Cost per Unit)]/ Quantity* (Price –Variable Cost per unit)
– Fixed Operating Cost}. Therefore;
For Organization A= [160,000(0.60-0.20)] /160,000(0.60-0.20)-60,000=64,000/4,000
=16
For Organization B= [160,000* (0.60-0.50)]/160,000(0.60-0.50)-12,000 = 4 Therefore, firm A has a higher operating gearing compared to firm B • What is the expected net income of both firms? The expected net income for firm A is 4,000 [(160,0000.60)-(60,000+0.20160,000)]. Which is similar to the expected net income for firm B [(160,0000.60) –
(12,000+0.50160,000)]= 4,000. Therefore, the expected net income for both firms is 4000 • If the sales are 140,000 units, then the expected net income for firm A will be 4000 [(140,0000.60) – (60,000+ 140,0000.20)]. For firm B, the expected net income is 2000 [(140,0000.60)- (12,000+140,0000.50)]. Consequently, if the sales were 180, 000 units, then the expected net income for firm A will be 20, 000 [(180,0000.60) – (60,000+140,0000.20)]. Consequently, the expected net income for firm be will be 6,000 [(180,0000.60)-
(12000+180,000*0.50)]
• The firm that is facing more risk in terms of current sales prediction is firm B that has
a lower operating Gearing. Firms with higher operating gearing can make more money as

4

compared to firms with lower operating gearing from incremental revenues (Richards, 2013).
This tendency is because they don’t have to increase their cost of production to make those
sales (Mclaney & Atrill, 2010). But firms with lower operating gearing have to increase their
cost of production to increase sales.

5

References

CAFFERKY, M. E., & WENTWORTH, J. (2010). Breakeven analysis the definitive guide to
cost-volume-profit analysis. [New York], Business Expert Press.
Richards, D. (2013). How to do a breakeven analysis.
Alhabeeb, M. J. (2012). Break‐Even Analysis. Mathematical Finance, 247-273.

MCLANEY, E. J., & ATRILL, P. (2010). Accounting: an introduction. Harlow, Financial
Times Prentice Hall.