Exercise on Total Cost, Revenue, Profit and Break-even

Learning Outcome:
At the end of this lesson, you will are able to do the following:
1. Explain the difference between revenue and profit
2. Calculate total variable cost, total cost, contribution margin and total revenue
3. Explain the usefulness of breakeven analysis
4. Calculate breakeven analysis in units and in RM
5. Explain how contribution margin and fixed cost affect break-even

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 × 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑢𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 (𝑢𝑛𝑖𝑡𝑠) = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 −𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 (𝑝𝑟𝑖𝑐𝑒) = + 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑇𝑎𝑟𝑔𝑒𝑡𝑡𝑒𝑑 𝑠𝑎𝑙𝑒 𝑣𝑜𝑙𝑢𝑚𝑒

Lessons to learn
1. Revenue does not reflect profit—an organization may generate much revenue but if its
operating expenses and other costs are very high, the organization may still be operating at a
loss.
2. Break-even is simply the amount of units to be sold to meet total costs. At break-even point,
profit is zero.
3. The lower the fixed cost, the lower is the required sales to break even.
4. The higher the contribution margin, the lower is the required sales to break even.

Example:
Mak Limah sells karipap at a street stall on Jalan Mawar. Her fixed cost per month is RM 1200
which includes rental and wages. Her variable cost per karipap is 20 sen and sells each karipap
at a price of 50 sen. On average, she can sell 10,000 karipap per month.

(a) Calculate what is Mak Limah’s profit.

(b) Calculate what is her break-even point in units.
(c) Calculate her break-even (price) if she plans to sell at least 8500 karipap per month.

Solution:
Total fixed cost: RM 1200
Total variable cost: RM 0.20 x 10,000 = RM 2,000
Total cost = Total fixed cost + Total variable cost = RM 1,200 + RM 2,000 = RM 3,200
Total revenue = RM 0.50 x 10,000 = RM 5,000
Profit = RM 5,000 – RM 3,200 = RM 1,800

Last edited June 2016

Break-even (unit) = total fixed cost / (price per unit – cost per unit)
= RM 1200 / (RM 0.5 – RM 0.2)
= RM 1200 / RM 0.3
= 4,000 karipap

Break-even (price) = (total fixed cost / targeted sales volume) + variable cost per unit
= (RM 1200 / 8500) + RM 0.2
= RM 0.14 + RM 0.2
= RM 0.34 (or 35 sen)

Last edited June 2016