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    Break Even Analysis

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    emmanuel Johny
    Break even analysis is used to determine the sales volume needed to cover total costs. It involves plotting fixed costs, variable costs, total costs and sales revenue on a chart with quantity on the x-axis and money on the y-axis. The break even point is where total costs equal sales revenue. It shows the sales needed to break even without a profit or loss. Managers use break even analysis to understand how costs and profits are affected by different production and sales levels.

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    Break Even Analysis

    Uploaded by

    emmanuel Johny
    4K views6 pages
    Break even analysis is used to determine the sales volume needed to cover total costs. It involves plotting fixed costs, variable costs, total costs and sales revenue on a chart with quantity on the x-axis and money on the y-axis. The break even point is where total costs equal sales revenue. It shows the sales needed to break even without a profit or loss. Managers use break even analysis to understand how costs and profits are affected by different production and sales levels.

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    Break even analysis is used to determine the sales volume needed to cover total costs. It involves plotting fixed costs, variable costs, total costs and sales revenue on a chart with quantity on the x-axis and money on the y-axis. The break even point is where total costs equal sales revenue. It shows the sales needed to break even without a profit or loss. Managers use break even analysis to understand how costs and profits are affected by different production and sales levels.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    4K views6 pages

    Break Even Analysis

    Uploaded by

    emmanuel Johny
    Break even analysis is used to determine the sales volume needed to cover total costs. It involves plotting fixed costs, variable costs, total costs and sales revenue on a chart with quantity on the x-axis and money on the y-axis. The break even point is where total costs equal sales revenue. It shows the sales needed to break even without a profit or loss. Managers use break even analysis to understand how costs and profits are affected by different production and sales levels.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 6

    BREAK EVEN ANALYSIS

    Break even analysis is the analysis of the relationship of cost, volume ,profit revenue, volume of
    sale for a particular product of a company.
    Break even analysis is usually done with the help of a break even chart. Break even chart is a
    graphical representation of various components like Fixed cost, Variable cost, Total cost, Quantity
    of production/sales, sales revenue, profit/lose and margin of safety. The chart has Quantity of
    production/sales on X axis and cost/sales revenue in Rupees on Y axis. It is assumed that the
    quantities of production and sales are same

    COMPONENTS OF BREAK EVEN CHART


    1. FIXED COST
    Fixed cost is the costs that remain constant irrespective of Quantity of production . It includes
    • Salary
    • Administrative expenses
    • Rent and other establishment charges
    • Depreciation
    Fixed cost is represented by a line parallel to X axis.

    2. VARIABLE COST
    Variable cost is the sum of costs that vary directly with the volume of production / sales. It includes
    • Direct labor costs consisting of wages and other benefit paid to direct workmen
    • Direct material cost
    • Other semi-variable costs like fund, electricity, maintenance, transport etc
    Variable cost at any quantity of production/sale = variable cost per piece X Quantity
    Variable cost is represented by inclined line starting from (0,0)

    3. TOTAL COST
    Total cost of any point represents the sum of fixed cost and variable cost at that quantity.
    Total cost = Fixed cost + variable cost
    Total cost is represented by an inclined line starting from cost in Y axis (0.FC)

    4. SALES REVENUE
    Sales revenue is represented by an inclined line starting from (0,0)

    ANALYSIS OF BREAK EVEN CHART


    1 BREAK EVEN POINT (BEP)
    Break even point is the point in BE chart where Sales Revenue = Total cost. It is represented a
    point where the Total cost line crossed the Sales Revenue line. At BEP, there is no loss and no
    profit.

    2 BREAK EVEN QUANTITY (BEQ)


    The quantity of production/sales at BEP is termed as Break even Quantity

    3 BREAK EVEN COST/REVENUE


    The sales revenue or total cost at BEP is termed as BE Revenue or BE cost

    4 PROFIT
    Profit at a particular Quantity is
    Profit = Sales revenue – Total cost for that Quantity. It represents the area between the sales
    revenue line and total cost line after BEP in the BE chart

    5 LOSS
    If sales revenue is less than total cost, the product is making a loss

    Loss= Total cost – sales revenue for that quantity


    It is represented by the area between the two lines before BEP in the BE chart

    6 ANGLE OF INCIDENCE
    It is the angle between sales revenue line and the total cost line. Large angle indicate higher rate of
    profit, means higher profits for small increase in sales.

    7 MARGIN OF SAFETY

    QUANTITY
    Margin of safety (Quantity) = Present Quantity of Sale – BE Quantity
    The importance of margin of safety is that it shows graphically the vulnerability of company’s
    profit due to changes in Quantity of Production/sale. If the distance or difference is large, even if
    there is a serious drop in production/sales, the profit will not be affected much. If the distance is
    short, a small drop in production /sale will lead to loss for the company. Margin of safety can be
    expressed in absolute values or as %age of the current level of production/sale.

    MARGIN OF SAFETY (Rs)


    = Present sales value –BE Revenue

    example
    = total sale – BEP Sale
    =sale Rs 5,00,000, BEP sale = 3,00,000
    Margin of Safety 500000-300000 = 200000
    It can be represented as 40% (200000/500000 x 100 )

    CONTRIBUTION
    Contribution is the difference between the sale price / unit and the marginal cost (variable cost) per
    unit
    Suppose the selling price is Rs 10/ unit
    Variable cost is Rs 7/ unit
    Fixed cost Rs 30,000
    Contribution is Rs 3

    ADVANTAGES OF BREAK EVEN ANALYSIS


    1 Calculation of profit of different sales volume
    2 Calculation of sales volume to produce desired profit.
    3 Calculation of selling price per unit for a particular break even point
    4 Calculation of sales volume required to meet proposed expenditure
    5 Determination of sales required to offset price reduction
    6 Measurement of effect of changes in profit factors
    7 Choosing the most profitable alternatives
    8 Determining the optimum sales mix
    9 Deciding on changes in capacity

    LIMITATIONS OF BE ANALYSIS
    The break even analysis is based on a number of assumptions which are rarely found in real
    life. Hence its managerial utility becomes limited. Its main limitations are as follows

    1 Both cost and revenue should be taken into account to determine the break even point.
    The one without the other has no meaning. But this analysis pre suppose that prices do not
    change while in actual life, price do changes as a result of several factors eg-change in
    demand, fashion, styles etc
    2 It assumes that all costs can be divided into fixed and variable costs, that they vary in
    linear fashion and that the principle of cost variability applies to them. All these
    assumptions do not hold true
    3 This analysis ignores the time lag between production and sales. The production quantity
    may be kept constant, but the sales are bound to vary from period to period. This feature
    of sales reduces the significance of BE analysis as a management guide.
    4 Factors like plant size, technology and methodology of production have to be kept
    constant in order to draw an effective break even chart. But it is not found in actual life.
    5 The analysis does not take into account the capital employed in the production and its cost
    which is an important consideration in profitability decisions.
    MATHEMATICAL CALCULATION OF BEP

    Contribution Selling price-variable cost An example


    Calculate BEP from the following
    information
    Total cost = Rs 55000
    Fixed cost = Rs 20000
    Sale(7000 units) = 70000
    VC=55000-20000 = 35000 OR
    Rs 5
    Contribution per unit =
    10-5 = Rs 5
    BEP in Units = 20000/5=40000 u

    BEP in value= FC+VC


    20000+20000 = Rs 40000
    Profit Contribution-fixed cost
    Fixed cost Contribution – profit
    contribution Fixed cost+profit
    PV Ratio Contribution per unit
    (Profi volume ratio) Selling price per unit

    Contribution x 100
    sales
    BEP (output) BEP (Rs)
    Fixed cost Fixed cost x selling price/unit
    Contribution per unit Contribution / unit
    or
    Fixed cost x Total sales
    Total contribution
    or
    Total fixed cost
    1- variable cost per unit
    selling price per unit
    or
    fixed cost
    P/V Ratio

    A factory making 12000/50=240 m/cs 1200x250/50=Rs 60000/=


    sewing m/c has or
    capacity to produce 240x250 = Rs60000/= 12000 x 125000/25000=
    500 m/cs per Rs 60,000/=
    annum. The Or
    variable cost of 12000
    each m/c is Rs 200 1- 200/250=12000
    and each m/c is sold 1/5
    for Rs 250. Fixed = Rs 60,000/=
    expense are Rs or
    1200 pm. Calculate 12000/20% = Rs60,000/=
    the BEP for output
    and sales. NE – PV RATIO=

    Cntribution x 100
    Sales

    25000/125000 x 100 = 20%

    Margin of Safety Example


    Total sale= Rs 1,50,000
    = total current Variable cost = Rs 75,000
    sales-BE Sales Fixed cost = 50,000

    Margin of safety=
    Formula BE Sales = fixed cost
    Net profit P/V Ratio
    P/V Ratio = 50,000/50%
    NB- margin of = Rs 1,00,000
    safety can be
    expressed as net profit = contribution
    percentage of sales minus fixed cost
    Margin of safety x 100 = 75000-50000=25000
    Total sales margin of safety=
    Or Rs 1,50,000-1,00,000
    Sales-BE sales x100
    Sales
    Rs 50,000
    Or
    = net profit
    P/V Ratio =
    25000/50%= Rs 5000o/=
    Calculation of Sales in units
    sales to get desired FC+desired profit
    profit P/V Ratio
    Sales in Rs
    FC+desired profit
    P/V Ratio

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