Pringly Division



Pringly Division

Breakeven Analysis

Breakeven point is mostly used by managers to determine the level of activity at which there is no profit or loss faced by the organization. It can be calculated by doing a CVP analysis. It is interpreted as the level of output at which the revenues earned are sufficient enough for covering all fixed costs. It is the point at which profit becomes zero (Dayananda et al., 2002). The breakeven point can be calculated by using the following formula:

Breakeven point = Total fixed cost / Price per unit - Variable cost per unit

The breakeven point as per the first strategy of the company is calculated below:

X = 142857

The breakeven point as per the second strategy of the company is calculated below:

X = 147058.82

If the company applies first strategy then it can make a profit of 142857 * 170 = 24285714 and if the company applies second strategy then it can make a profit of 147058.82 * 200 = 29411764.71. Therefore, it is evident that the company can achieve its target profitability level of 4000,000 in case of both strategies. The company can attain higher profit than expected in case of second strategy.

Margin of safety

The concept of margin of safety is referred to as the disparity between anticipated level of sales and the breakeven point. It is estimated that large margin of safety has the higher probability of allowing company to make huge profits. Therefore, if sales of a company begin to decline then company having larger margin of sales has this leverage of making sufficient profit before incurring losses. This concept is based on the assumption that the expected sales volume is higher than the breakeven point (Yee, 2008). The margin of sales can be calculated on the basis of the following formula:

Margin of sales = ...