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    01 BreakEvenAnalysis

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    ss4micky
    Break-even analysis is used to evaluate fixed and variable costs to determine the sales volume needed to earn a target profit. It assumes costs can be separated into fixed and variable categories and that selling price and production volume influence costs. The break-even point is where total sales revenue equals total costs, resulting in no profit or loss. It can be calculated by dividing total fixed costs by the contribution margin per unit or by dividing fixed costs by sales revenue minus variable costs. Calculating break-even point allows understanding of how changes in sales mix or costs affect profitability.

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    01 BreakEvenAnalysis

    Uploaded by

    ss4micky
    41 views4 pages
    Break-even analysis is used to evaluate fixed and variable costs to determine the sales volume needed to earn a target profit. It assumes costs can be separated into fixed and variable categories and that selling price and production volume influence costs. The break-even point is where total sales revenue equals total costs, resulting in no profit or loss. It can be calculated by dividing total fixed costs by the contribution margin per unit or by dividing fixed costs by sales revenue minus variable costs. Calculating break-even point allows understanding of how changes in sales mix or costs affect profitability.

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    BEP

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    01-BreakEvenAnalysis

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    Break-even analysis is used to evaluate fixed and variable costs to determine the sales volume needed to earn a target profit. It assumes costs can be separated into fixed and variable categories and that selling price and production volume influence costs. The break-even point is where total sales revenue equals total costs, resulting in no profit or loss. It can be calculated by dividing total fixed costs by the contribution margin per unit or by dividing fixed costs by sales revenue minus variable costs. Calculating break-even point allows understanding of how changes in sales mix or costs affect profitability.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views4 pages

    01 BreakEvenAnalysis

    Uploaded by

    ss4micky
    Break-even analysis is used to evaluate fixed and variable costs to determine the sales volume needed to earn a target profit. It assumes costs can be separated into fixed and variable categories and that selling price and production volume influence costs. The break-even point is where total sales revenue equals total costs, resulting in no profit or loss. It can be calculated by dividing total fixed costs by the contribution margin per unit or by dividing fixed costs by sales revenue minus variable costs. Calculating break-even point allows understanding of how changes in sales mix or costs affect profitability.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 4

    Break Even Analysis

    Introduction
    Break-even analysis is used to plan the profit & production.
    Break-even analysis evaluates and compares the fixed costs and variable costs.
    This is no profit or no loss situation.

    Use of Break even analysis
    To study the effect of CVP ratio.
    To know the effect of changes in sales mix.
    To determine the volume of sales to earn targeted profits.
    To decide to enhance the production of profitable products or to reduce /discontinue the
    production of low profitable or loss making products.

    Assumptions on Break-even point.
    The following assumptions are such which are true and valid in certain set of circumstances
    up to a certain level.
    All costs are divisible into fixed and variable.
    All fixed costs remain constant at all levels of output within the installed capacity.
    The variable costs vary along with production.
    The selling price is assumed to be constant.
    The volume of production influences the cost.
    There is synchronization between production and sales, which would help deciding the
    break-even point.

    Break even point
    The break-even point may be termed as that point of sales volume at which the total income
    is equal to total costs.
    It is a point of sale and production where there is no profit no loss.
    BEP can be decided in terms of units and as well as in monetary terms.
    Any production or sales below this point results into loss or any production or sales beyond
    this, yields profit.
    2

    Definitions
    Variable Costs:
    (Direct materials, direct labor and variable overheads) will be incurred in direct proportion to
    the level of production.
    Fixed Costs:
    Most overheads are time-based and remain constant, or fixed, regardless of the level of
    production.
    Total Costs:
    Total costs at any level pf production are obtained by adding the fixed costs to the variable
    costs.
    Formula of BEP

    BEP in units = Total fixed costs
    ---------------------------------------------
    Sales price less variable cost per unit

    = Total fixed costs divided by contribution per unit.


    Formula of BEP


    BEP in Sales value= Fixed costs x Sales
    ---------------------------
    Sales Less Variable cost

    Example
    Sales 6000 units
    Sales price per unit Rs. 60=00
    Variable cost per unit Rs.40=00
    Fixed costs Rs. 40000=00
    3

    BEP in units

    Fixed costs Rs.40000=00
    Contribution per unit Rs. 20=00 (Rs.60=00 less Rs.40=00)
    BEP in units 40000 divided by 20 = 2000 units.
    2000 x Rs. 60=00 = Rs. 120,000

    BEP in Sales Value

    Fixed costs Rs. 40000=00
    Sales Rs. 360,000=00
    Variable costs Rs. 240,000=00
    BEP in sales value 40000 x 360,000 divided by 120,000=Rs.120000/-


    Margin of safety

    Margin of safety = Sales less Breakeven Sales.
    MOS=6000 2000 = 4000 / 66.7 %
    Conclusion: Even if Sales decrease by 66.7 %, unit will not incur loss.

    Conclusion

    BEP Analysis will help the Banker in appraisal of actual / projected performance of the
    borrower. It also acts as sensitivity analysis tool to judge the projected performance.
    It will play supporting role to DSCR.





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