# In other words contribution margin is equal to fixed

• 33

This preview shows page 19 - 22 out of 33 pages.

In other words, contribution margin is equal to fixed expenses. As per the above model, the contribution margin must be equivalent to fixed expenses of Rs5,740,000 to calculate the breakeven point with the following formula. Volume in units at breakeven = ¿ expenses Contribution margin perunit = Rs5,740,000/Rs2.5 = 2,296,000 units Total revenues at breakeven = ¿ expenses Contribution marginratio = Rs5,740,000/35.7143% = Rs16,071,993.57 Also, the volume in units at breakeven can be calculated with the following formula. Volume in units at breakeven = Total revenuesrequired Revenue per unit = Rs16,071,993.57/Rs7 2,296,000 units Basically, the breakeven analysis is usually illustrated in a graphical format. By using the calculation of breakeven in terms of sales volume or total revenues, we 16 | P a g e
thus can construct a breakeven chart. Following is the breakeven graph (Exhibit 2) which presents and interprets the important relationship for Fly Ash Brick Project. Exhibit 2 To construct a breakeven chart using the given information, units are plotted on horizontal axis and total Indian Rupees on the vertical axis. The total cost line is structured by combining the fixed cost and variable cost of Rs4.5 per unit. From Exhibit 2, the grey line of total revenue interests with the orange line of total cost at the breakeven point of (2,296,000 , 16,071,993.57). Put simply, Sharma needs to sell 2,296,000 units of Fly Ash Bricks in order to have neither profit nor loss (breakeven). The fixed cost seems to to be a horizontal line at an amount of Rs1,140,000 as the fixed cost is similar to any production volume, meaning that the total fixed cost 17 | P a g e
remain unchanged as level of activity changes. For the total revenue function, the total revenue will be zero if zero units is sold. Therefore, the total revenue line is reflecting by (0,0) and will pass through the break-even point. While, for total cost, when zero units is produced, the total cost is equivalent to the fixed cost. So the total cost line will start at the fixed cost and pass through the break-even point. There are the area between the two lines (TR and TC) is marked as “loss area” and “profit area.” Beginning with an amount equal to total fixed expenses of Rs5,740,000 at a sales volume of 0 unit until the breakeven is achieved, the region constitutes losses, as the total cost seems higher than the total revenue. On the other hand, the total revenue is greater than the total cost after the breakeven, it can be said that the company is making profit . The breakeven point is likely to be useful to managers while doing a business plan. This is because it expresses a minimum revenue target, and easy for managers to pinpoint the amount of sales (or revenues) as regards with the variable and fixed expenses. For instance, the manager is looking at the breakeven and saying that the company cannot sell that many units and need to relook at the way that can works.