Example of Desired Profit

Example of Desired Profit

In the below example it is explained that how with the help of break even formula the desired profit level can be calculated. To calculate the desired profit volume simply the desired profit is added to the fixed cost and divided by the unit contribution.

Formula for desired profit level

= (Fixed Cost + Desired profit)/unit contribution

Example of Desired Profit

Sale price per unit	200
Direct Material per unit	60
Skilled Labour (Direct)	30
Factory Overheads	30
Factory Fixed Cost	40,000
Desired profit	60,000

Calculate the sale volume to achieve a profit of 50,000?

Solution

Step 1 calculate unit contribution

Sale price		200
Variable cost	(60+30+30)	120
Unit Contribution	(200-120)	80

Step 2 calculate the desired profit volume

Fixed Cost+ Desired Profit	60,000+40,000	100,000
Unit contribution		80
Desired profit volume	100,000/80	1250

Check

	Unit	Rate
Sales	1250	200	250,000
Variable Cost	1250	120	150,000
Contribution			100,000
Fixed cost			(40,000)
Desired Profit			60,000

Example of break even

Example of break even

Break even is a point where the organization is able to recover its fixed cost only and therefore this is no profit no loss situation. There are two methods of calculating the break even point i.e.

Formula for break even

Break even point = Fixed Cost / unit contribution

Example of Break even

Unit Sale Price	120
Unit Material Price	60
Unit Labour	20
Unit Overheads costs	20
Fixed asset	60,000
Calculate break even

Solution

Step 1 Calculate unit contribution

Sale price		120
Variable cost	(60+20+20)	100
Unit Contribution	(120-100)	30

Step 2 calculate breakeven point

Fixed cost		60,000
Break even	60,000/20	3000 units

Check the breakeven point

	unit	Rate
Sales	3000	120	360,000
Variable Cost	3000	100	300,000
Contribution			60,000
Fixed cost			(60,000)
Profit			0

In above example it is explained that when 3000 units are sold then there is no profit no loss situation which is technically knows as breakeven point. The above explained method of break even calculation is known as volume based break even i.e. break even volume is calculated or break even is calculated first in term of volume and then it is converted into amount.

Example of Contribution to Sales Ratio

Example of Contribution to Sales Ratio

There are two method of calculating the break even point. In this method break even is calculated directly in term of amount.

Formula

Break Even = Fixed Cost/ Contribution to sales ratio

Example of break even

Unit Sale Price	40
Variable cost	25
Fixed Cost (Rent)	50,000

Calculate break even by using contribution to sale ratio

Solution

Step 1 Calculate the Unit Contribution

 Contribution to sale ratio is calculated by subtracting the unit variable cost from the unit sale value.

Unit Sales	40
Less: Unit Variable Cost	(25)
Unit Contribution	15

Step 2 Calculate the contribution to sales ratio

Contribution to sale ration is calculated by dividing the unit sales by unit contribution.

Contribution/Sales

15/40

37.5%

Step 3 Calculate the break even Sales

Break even point is calculated in term of sales by dividing the fixed cost by contribution to sales ratio.

Fixed Cost/Contribution to sale Ratio

50,000/.375

133,333

The number of unit required to be sold to achieve break even sales may be calculated by dividing the break even sales with unit sales price i.e. 133,333/ 40 = 3,333 units