Cost Analysis and Control

Unit 7
Overview of Break-Even Analysis
Table of Contents
6.1. Introduction
Learning Objectives
6.2. Break-Even Analysis
Self Assessment Questions
6.3. Multiple Break Even
Self Assessment Questions
6.4. Differential Cost Analysis
Self Assessment Questions
6.5. Break Even Charts
Self Assessment Questions
6.6. Summary
6.7. Glossary
6.8. Case Study
6.9. Terminal Questions
Answer Keys
A. Self Assessments Questions
B. Terminal Questions
6.10. Suggested Books and e- References

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Cost Analysis and Control Unit 6

6.1. INTRODUCTION

In the previous chapter, we focused on the costing techniques and methods of control and a
detailed overview of marginal costing. The intent of this unit to introduce you to the notion
of break-even analysis, multiple break-evens, differential cost analysis, and break-even
charts.

The term "break-even analysis" pertains to the "determination of the level of operations at
which total income equals actual costs." It is a method of calculating the likely gain or loss
at any stage of the operations. Break-even analysis is a way of understanding the
relationship between sales revenue, variable expenses, and fixed expenses to find the level
of operation at which all expenses equal sales revenue and there is no gain and no losses.

This is a pivotal step in profit forecasting and management decision-making. Graphical

charts are used to do a break-even analysis. The break-even chart depicts the profit or loss
at various levels of sales volume within a certain range. The break-even charts display fixed
and variable expenses as well as sales income, allowing profit or loss to be calculated at any
level of production or sales. If fixed costs can be estimated individually for each product, a
break-even analysis for each kind of product may be conducted for firms that produce
many products.

The differential analysis explained in this unit is an example of a management accounting

methodology in which we assess just the changes in revenues, expenses, and profits that
occur as a result of a company choice rather than constructing full income statements for
each option.

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Cost Analysis and Control Unit 6

LEARNING OBJECTIVES

After studying this chapter, you will be able to:

❖ Explain the concept of Break-Even Analysis

❖ Describe the meaning of Multiple Break Even
❖ Explain the meaning and concept of Differential Cost Analysis
❖ Describe the concept of Break-Even Charts

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Cost Analysis and Control Unit 6

6.2. BREAK-EVEN ANALYSIS

Break-even point analysis is a tool for determining the minimum amount of output
required to break even by analysing the relationship between sales, variable, and fixed
costs. The volume of output or revenue at which there is no profit or deficit is referred to as
break even. In other words, the amount of output or sales at which associated expenses
match with earnings is known as the Break-Even Point. It aids in determining the
relationship between costs and sales revenue and production. Cost, volume, and profit are
often used to calculate the breakeven point. In day-to-day business, the break-even analysis
is used to address a variety of management questions. The formal break-even chart is as
follows:

Source- icmai.in
Fig 1: Break-Even Analysis

In the above figure:

• The X-axis depicts the number of units of the product

• Y-axis depicts the cost of production and revenue obtained from sales

We can see three lines in the graph:

• Fixed cost line- straight line (x=0 and y= fixed cost)

• The line representing total cost (Fixed cost + Variable cost): Total cost line starts
from the point where variable cost is zero and indicated fixed cost that is (x=0,
y=fixed cost), When there are zero units of production the variable cost is zero and
fixed cost remains the same. As the number of units increases variable cost also
increases proportionally. Hence total cost line moves with the increase in the
number of units produced/sold, (x=variable cost, y=fixed cost)

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Cost Analysis and Control Unit 6

• The line representing total sales: Total sales line starts from the point (x=0, y=0),
represented by a straight line.

In the graph we can see that the total sales line intersects with the total cost line at one
point, indicating the meaning that total sales are equal to the total cost at the intersecting
point. The perpendicular line drawn from the point of intersection to the x-axis touches the
x-axis at a particular point and this point is known as coordinate for breakeven units,
(value of x= break-even units). Likewise, drawing a perpendicular line from the point of
intersection to the y axis intersects the y axis at Break Even
point in terms of value. The angle formed by the intersection of STUDYNOTE
total cost and total sales line is called as Angle of Incidence.
If the break-even
threshold is not reached,
Contribution Break-Even Chart the company will lose
liquidity and may become
A contribution breakeven chart follows the same concepts as a insolvent in the long run.

traditional breakeven chart, but instead of displaying the fixed

cost line, it displays the variable cost line. The total cost and sales revenue lines stay intact.
The breakeven point and profit can be interpreted similarly to a traditional chart. You may
also read the contribution for every level of activity.

Source- icmai.in
Fig 2: Contribution Break-Even Analysis

The difference between the sales revenue line and the variable cost line can be viewed as
the contribution.

Angle of Incidence

The angle between the sales and total cost lines is known as the Angle of Incidence. This
angle indicates the firm's profit-earning ability over breakeven point sales. In a formal

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break-even chart, the Angle of Incidence is the angle produced at the intersection point of
the total sales and total cost lines. If the angle is wider, the profit growth rate is higher; if
the angle is less, the profit growth rate is lower. As a result, Angle of Incidence depicts
profit growth or profitability rate. Analysis of Cost-Volume-Profit (CVP analysis) is a
strategy for determining the link between costs, volume, and profit.

Breakeven points and profits may be determined quickly using breakeven charts.
Furthermore, breakeven charts are used by management to plan profit. The variations in
revenue due to changes in expenses and output may be easily understood using charts.
This type of financial forecasting is known as breakeven analysis, and it is done with the
variables of cost, profit, and volume.

Break-even analysis, cost-volume-profit analysis, and profit graphs are all equivalent terms.

It contains information on the following topics:

• The relationship between cost and volume.

• Production or sales volume at which the company will break even
• Profit sensitivity to production fluctuation
• Profit amount for a forecast sales volume
• Production and sales volume for the desired profit level various changes have an
impact on profit.

Management may benefit greatly from a grasp of CVP analysis when it comes to budgeting
and profit forecasting. It discusses the net profit impact of the following.

• Changes in selling prices,

• Changes in volume of sales,
• Changes in variable cost,
• Changes in fixed cost.

Activity:

Suppose company manufactures below the desired units which means below the
break-even point due to some uncertainty in business. The variable cost was high
and company was unable to cater market demand. Describe what company
should do it avoid losses in business and suggestion for future how they can
manufacture product above and at the point of break-even?

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Cost Analysis and Control Unit 6

SELF ASSESSMENT QUESTIONS

1. Contribution break-even chart displays:

A. Fixed cost line
B. Variable cost line
C. All of the above
D. None of the above.

2. CVP analysis discusses the net profit impact of changes in the volume of sales
only. [True/False]

3. The angle between the sales and ___________ is known as the angle of incidence.

6.3. MULTIPLE BREAK EVEN

Once variable and fixed costs have been calculated, determining the break-even point in
CVP analysis is simple. When an organisation sells many types of products, difficulty arises.

Calculating weighted average contribution margins allows

STUDYNOTE
for break-even analysis for numerous items. If fixed costs can
be estimated individually for each product, a break-even Fixed expenses must be re-
analysis for each kind of product may be conducted for firms allocated among the remaining
goods whenever a product is
that produce many products. However, because fixed costs removed from the composite
are usually incurred for all items, the composite or multi- unit or sales mix.
product break-even value must be calculated.

The weighted average unit contribution margin and weighted-average contribution margin
ratio are used to calculate the multi-product break-even point.

Total fixed cost

Break even point=
Weighted average contribution margin per unit

Total fixed costs

Break even point in dollars=
Weighted average CM ratio

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Cost Analysis and Control Unit 6

Activity:

The HUL deals in variety of products and they want to calculate the break-
even point. The details are as follows:
Percentage of sales in four products is as follows:
Shampoo- 10%
Soaps- 25%
Detergents- 35%
Toothpaste- 20%

Shampoo Soaps Detergents Toothpaste

Price per unit Rs. 150 Rs. 25 Rs. 90 Rs. 180
Variable cost Rs. 40 Rs. 10 Rs. 14 Rs. 65
per unit

Calculate break even analysis from the above details.

SELF ASSESSMENT QUESTIONS

4. Which of the following is involved in the calculation of multiple breakeven?

A. Weighted average unit contribution margin
B. Weighted average contribution margin ratio
C. All of the above
D. None of the above.

5. Calculating weighted average contribution margins allows for break-even

analysis for numerous items. [True/False]

6. If ___________ associated with the production for each product is evident, a

break-even analysis for each kind of product may be conducted for firms that
produce many products.

6.4. DIFFERENTIAL COST ANALYSIS

The difference in costs that occurs as a result of taking a certain course of action (alternate
to the existing strategies) is referred to as differential cost. Alternative behaviour can result
from changes in market volume, price, product mix (by increasing, limiting, or
discontinuing output of certain items), production methods, sales, or sales promotion, or
from 'make or purchase' or 'take or reject' decisions. As prices change due to a change of
operation from one stage to another, the differential cost may be incremental cost or

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Cost Analysis and Control Unit 6

decremental cost. It is called incremental cost when the cost rises due to a growth in the
scale of output, and it is called decremental cost when the cost falls due to a reduction in
the scale of output. However, most accountants will not differentiate between differential
and incremental costs, and the two terms are used interchangeably.

The calculation of differential cost is a valuable method of measurement for management

to predict the outcomes of any planned improvements in the degree or nature of
operations. When it comes to making strategic choices, differential costs calculated based
on alternate options are very useful.

The calculation of differential cost is straightforward. The algebraic difference between the
applicable costs for the alternatives under consideration is
represented by differential cost. When two kinds of operations STUDYNOTE
are considered, the differential cost is calculated by subtracting
one level's cost from another level's cost. Differential costing focuses
on the change in overall
costs associated with
Vital Features various options.

• Costs, income, and investment factors that apply to the issue on which the research
is performed serve as the basic data for differential cost analysis.

• The total or aggregate of differential costs is considered rather than the costs per
unit. Differential cost estimation is performed independently of accounting records.

• When considering the disparities in costs between two levels, absolute costs at each
level are less important than the disparity between the two. As a result, aspects of
the cost that do not adjust but are the same with both of the alternatives are
overlooked.

• The differences are calculated using a standard starting point or position.

• The stage at which the variance between income and expense is the greatest, as
determined from a standard base point, decides which of many options to pursue.

• Historical or normal costs may be used to compute differential costs, but they must
be modified to meet the needs of future scenarios.

• The cost elements and aspects to consider in differential cost analysis can vary
depending on the issue and the solutions being studied.

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Cost Analysis and Control Unit 6

Differential Costs Analysis and Marginal Costing

While differential costs analysis and marginal costing approaches are similar, they should
not be confused. The below are the areas of similarities and distinction between differential
costs analysis and marginal costing:

• Similarity

➢ Both the techniques of cost analysis and cost presentation.

➢ Both are used by management when making decisions and implementing plans
or policies.

➢ The differences in the behaviour of fixed and variable costs give rise to the ideas
of differential costs and marginal costs.

➢ Differential costs are similar to the economist's concept of marginal cost, which
states that marginal cost is the value that changes whether production is
increased or reduced by one unit at any given volume of output.

• Difference

➢ Differential cost analysis could well be performed in both absorption and

marginal costing scenarios.

➢ While marginal costing does not include all fixed costs, some fixed costs may be
considered important for differential cost analysis.

➢ Marginal costs may be included in the accounting system; however differential

costs must be calculated independently using analytical statements.

➢ In marginal costing, the margin of contribution and contribution ratio is the

primary efficiency and decision-making indicator. Differential costs are related
against incremental or decremental revenues, as the case may be, in differential
cost analysis.

Practical Application of Differential Costs

• Determination of the most lucrative production and pricing levels.

• Acceptance of a lower-priced offer or giving a lower-priced quote to boost capacity.
• It is used to determine if it is more lucrative to sell a product as is or to process it
into a new product that can be sold at a higher price.
• The decision to launch a new product or market sector.
• Discontinuing a product or company unit to avoid current losses or boost profits.

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Cost Analysis and Control Unit 6

• Altering the product mix and taking make or buy decision

• Alternative capital investment and facilities replacement decisions.
• A decision on whether or not to modify the manufacturing process.

Activity:

In Electro manufacturing company there are various products out of which

one product is Televisions, as they manufacturer on their own. Prepare a
table illustrating total differential cost from the given data of company.

Output (in Selling price Total semi- Total Total Fixed

thousands) per unit (Rs.) fixed cost (in Variable cost cost (in
thousands) (in thousands)
thousands)
40 800 22 50.01 20
55 775 22 66.09 20
62 650 36 78.00 20
68 600 38 84.07 20

Interpret your analysis and give suggestions what company should do?

SELF ASSESSMENT QUESTIONS

7. Practical applications of differential cost involve:

A. Fixing the product mix

B. Influencing make or buy decision
C. All of the above
D. None of the above.

8. Marginal costs may be included in the accounting system; however

differential costs must be calculated independently using analytical statements.
[True/False]

9. The difference in costs that occurs as a result of taking a certain course of

action is referred to as ___________.

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6.5. BREAK-EVEN CHARTS

A Break-even chart is defined as the graphical representation of Break-Even Analysis. The

Breakeven diagram, also described as the CVP chart or graph, is used to graphically
represent the Breakeven test. The obtained picture or diagram from break-even analysis is
called a break-even chart when the relationship between cost, amount of output, and
income is plotted graphically. In other words, a BE chart is a pictorial representation of the
relationship between an entity's costs, volume, price, and profits that graphically depicts
the impact of shifts in all of these variables on the entity's profitability.

• It is a very useful tool for guiding management about STUDYNOTE

the impact of improvements in costs and revenues on
earnings at various levels of output. Investors might use the
break-even chart while
trading options or
• It's a simplistic profit graph that everybody should constructing a strategy to
appreciate. Thousands of terms can be illustrated very acquire a fixed-income
clearly with the aid of a break-even chart. securities product.

• The graph not only depicts the stage at which overall costs and revenues
earned break even or equalize, but it also depicts the behaviour patterns of costs,
revenues, and earnings at various stages of production.

• Break-even analysis and break-even charts are used for profit forecasting. Growing
the amount set for sale, reducing the variable cost, or reducing the fixed cost are the
few ways to maximize earnings.

• A Break-Even Chart shows the approximate benefit or loss at various levels of sales
volume within a certain context. The break-even charts display fixed and variable
costs as well as sales income, allowing for the determination of profit or loss at any
particular stage of production or sales.

Construction of a break-even chart

Steps involved in the construction of a break-even chart are:

• Step 1: Set sales unit representing on the horizontal axis

• Step 2: Set costs and revenues on the vertical axis
• Step 3: Compute the fixed cost and mark the fixed cost point on the y axis (0,
y=Fixed cost) and draw a line starting from the point and parallel to the horizontal
axis.
• Step 4: Draw the total cost line, originating from the fixed cost point on the Y-axis
and moving with the increase in the variable cost.

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• Step 5: Total sales line starts from zero sales (x=0, y=0) to maximum sales
• Step 6: Mark breakeven point: The point of intersection of total cost line and total
sales line
• Step 7: Mark profit area and loss area: When the total unit falls below the break-
even units, that area of the chart represents the loss area. When the total unit rises
above the break-even units, that area of the chart represents the profit area.
• Step 8: Mark margin of safety: Total output or sales- break-even sales

Break-even chart discloses:

• The firm's likely earnings or losses at various units of output.

• The cost structure of variable and fixed costs.
• The production level at which the business breaks even, often known as the break-
even point.
• Margin of safety
• The angle of incidence- The angle formed by the intersection of total sales line and
total cost line. A wide-angle of incidence shows high profit and vice – versa.
• We can derive the PV ratio by dividing profit by margin of safety or dividing
contribution by sales.

Uses of Break-Even Chart (BEC)

• It gives you detailed and easy-to-understand information: A break-even chart

logically displays data and provides a complete picture of the connection or
behaviour of the different factors: costs, selling price, level of output, and company
profits.

• The profitability of the items is depicted by the BEC: Aside from the break-even
point, when the firm is making no profit and losing no money, the BE chart shows
the profitability of various items and so aids managers in making decisions on
whether to shut down or continue a product or the firm as a whole.

• It depicts how changes in cost and selling price affect profits: BE graphic clearly
shows the impact of variations in fixed cost, variable cost, and selling price on firm
profits for various levels of productions, assisting management in making
appropriate decisions.

• It aids in controlling costs: The BE chart visually depicts fixed costs in the overall
cost of the product, and if the fixed costs are excessive, management may take
corrective steps to reduce costs, such as eliminating waste and increasing efficiency.

• BEC aids in determining the comparative efficiency of the systems, which may be
analysed as follows: The BE chart can be used to compare the efficiency of different

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Cost Analysis and Control Unit 6

plants. The angle of incidence formed at the junction of the total sales line and the
total variable cost line indicates the production efficiency of a given system.

• It aids forecasting and long-term planning: A BE chart visually depicts the

relationship between the variables of cost, selling price, and volume, which aids
forecasting, long-term planning, and sustainability.

Source- icmai.in
Fig 3: Detailed Break-Even Analysis Chart

At the output level below the breakeven, point costs surpass the income. At the point of
intersection, costs equal income and it discloses a no profit and no loss scenario in the
business operations. As a result, the major goal of utilizing break-even charts as an
analytical tool is to investigate the impact of changes in output and sales on total revenue,
total cost, and, eventually, total profit. Break-even analysis is a broad approach to profit
planning and forecasting that may be used to answer a wide range of problems.

Break-even charts in various conditions can be used to study the change in profit in
the following ways:

• An increase in the number of units

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Cost Analysis and Control Unit 6

Source- icmai.in
Fig 4: Break-Even Chart: Increase in number of units

The lines 'CB and OA' denote a rise in the total cost and total sales. If we look closely at the
figure above, we can see that the BEP does not vary regardless of whether the number of
units increases or decreases.

• Increased sales as a result of higher selling prices.

NTS stands for "New Total Sales Line."

Source- icmai.in
Fig 5: Break-Even Chart: Increase in selling price

Changes in breakeven point and sales are shown by the ‘OB' line. We can see from the
graph above that increasing the selling price increases profit, and that if the selling price
varies, the BEP changes as well. BEP drops as the selling price is raised. When the selling

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price is reduced, the BEP rises. As a result, we may argue that the selling price and BEP
have an inverse relationship.

• Decrease in variable cost:

Source- icmai.in
Fig 6: Break-Even Chart: Decrease in variable cost

The ‘CB' line represents a drop in total cost and a fall in B.E.P. As seen in the graph above,
when variable costs are reduced, profit is undoubtedly enhanced. When the variable cost
varies, the BEP changes as well. When variable costs are reduced, BEP is reduced as well.
When variable costs rise, BEP rises with them. As a result, variable cost and BEP have a
direct relationship.

(iv) Change in fixed cost:

Source- icmai.in
Fig 7: Break-Even Chart: Change in Fixed Cost

'DE and DB' lines indicate a decrease in fixed cost and total cost respectively and a
consequent decrease in BEP. From the above chart also, we find that there is an increase in

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profit due to decrease in fixed cost. If fixed cost is increased, then BEP also increases. If
fixed cost is decreased, then BEP also decreases. Thus, there is a direct relationship
between fixed cost and BEP.

Nonlinear Break-Even Chart

Source- icmai.in
Fig 8: Non-Linear Break-Even Chart

The lines ‘DE and DB' reflect a drop in fixed and total costs, respectively, and a
corresponding fall in BEP. We can see from the following chart that there is an
improvement in profit owing to lower fixed costs. When the fixed cost rises, the BEP rises
with it. When fixed costs are reduced, BEP falls as well. As a result, fixed cost and BEP are
inextricably linked.

Cash Break-Even Point

The term "cash break-even point" refers to a break-even point that is computed exclusively
using fixed costs that are payable in cash. This implies that when calculating the cash
break-even point, depreciation and other non-cash fixed expenses are not included in the
fixed expenses. It is derived by dividing cash fixed cost by contribution per unit.

Activity:

Assume you are going to start selling drawing books through an ecommerce
portal. You have completed registration works and collected used books from
vendors for a fixed amount. Fix the retail price and draw a break-even chart
disclosing the breakeven point.

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Cost Analysis and Control Unit 6

SELF ASSESSMENT QUESTIONS

10. Practical applications of differential cost involve:

A. Fixing the product mix
B. Influencing make or buy decision
C. All of the above
D. None of the above.

11. The term "cash break-even point" refers to a break-even point that is
computed exclusively using variable costs that are payable in cash. [True/False]

12. ___________ expenses are not included in the fixed expense list to perform break
even calculations.

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Cost Analysis and Control Unit 6

Break-Even
Break-Even
Analysis Overview of Charts
Break-Even
Analysis

Differential Cost
Multiple Break
Analysis
Even

Fig 9: Conceptual Map

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6.6. SUMMARY

• The result of break-even analysis is neither a gain nor a loss. Instead, it calculates
how many sales are required to pay all variable and fixed expenditures. It
determines the minimal quantity of items to sell and the sales volume required to
cover all costs and make a profit.
• Small businesses will take a long time to break even. At the start of a company,
knowing the break-even sales volume is crucial. Any small company uses it as a
baseline efficiency measure because it sets the goal required to meet expenses and
make a profit.
• The company's market mix is regarded as a hybrid unit of multi-product CVP
analysis, a set of independent items associated together in accordance with the sales
mix. The integrated unit is not a product that is marketed to shoppers; rather, it is a
methodology that is used to measure a collective contribution margin, which is then
used to determine the multiple break-even points.
• In CVP analysis, differential analysis is helpful. It's because, to reach a decision, we
don't need to file full income statements for all cases. We just need to think about
the sales and expenses that shift.
• Break-even charts come in a variety of shapes and sizes, but they always show
revenues, expenses, profits, and losses at various production levels in addition to
the break-even point.
• Although a break-even chart depicts the variable degrees of profit or loss from
various sales quantities, the veracity of the data may be questioned at times due to
the graph's size and the expertise of the person who created it.

6.7. GLOSSARY

Contribution margin: The contribution margin is calculated by subtracting the sale price
per unit from the variable cost per unit. The part of total revenue that is not absorbed by
variable costs and thus contributes to the covering of fixed costs is referred to as
"contribution."

Deficit: A deficit arises when expenditure exceeds income, imports outweigh exports, or
liabilities outweigh assets in financial terms. A deficit is the inverse of excess and is defined
as a shortage or loss.

Fixed cost: A fixed cost does not shift as the number of products or services manufactured
or consumed increases or decreases. Fixed costs are charges that a corporation must pay
regardless of its business operations.

Management decision making: Modern management relies heavily on decision-making.

Fundamentally, the basic job of management is to make fair or sound decisions. Every
manager makes countless decisions, either subconsciously or consciously, making it a

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critical component of the manager's position. Decisions are crucial because they govern
both organisational and management activity.

Marginal costing: Variable expenses are paid to cost accounts, and the fixed costs due to
the relevant period are written out in full against the contribution for the duration,
according to the principle of marginal costing.

Product mix: The whole collection of products and/or services supplied by a company is
referred to as product mix, also known as product assortment or product portfolio. A
product mix is made up of product lines, which are related items that customers are likely
to use together or consider to be comparable products or services.

Profit: A monetary profit, particularly the gap between the amount gained and the amount
spent on purchasing, running, or creating anything

Variable cost: A variable cost is a business expense that fluctuates based on how much the
firm makes or sells. Variable costs grow or decline as a company's output or market volume
rises or falls—they rise as output increases decrease.

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6.8. CASE STUDY

Innovative Ventures Private Limited

Innovative Ventures Private Limited (a manufacturing firm) now produces a wide

range of items, the majority of which are cosmetics and toiletries. Their products
appeal to a small number of quality-conscious clients in the high-income category,
and the higher quality of their products has helped to establish their firm as a
dominating market player in terms of their present product line.

Over the years, the aforementioned firm has effectively implemented a basic yet
effective business plan that includes thorough market analysis, to identify the "gaps"
that exist in the cosmetics and toiletry market, as well as a comprehensive study of
sales forecasts that could occur if such a "gap" is filled, Develop, produce, and
introduce an item that fills such a "gap," and quickly grabs the market of the targeted
audience by aggressive advertising and marketing strength.

Such marketing and operational methods have proven to be incredibly efficacious, as

seen by the company's exceptional increase in the top line, bottom line, and
operating cash flows. However, the previous two product releases have failed to meet
expectations. In reality, the company's bottom line and operating cash flow
performance were negatively impacted in each of these situations. Naturally, both
two new products necessitated significant upfront costs, and the eventual results
failed to justify such expenditures. The organisation had conducted a post-mortem
examination of such failures and made every effort to determine the core issues that
led to such poor results. As the key causes for failure, such a post mortem analysis
fundamentally indicated incorrect calculation of potential future demand and
inability to foresee and manage a few operating hazards inherent in such investment
possibilities.
Now, Mr. Dasgupta (the company's CEO) is experimenting with a new product launch
plan that looks to be quite appealing at first sight. However, he had learned from his
previous experiences that an investment plan that appears to be extremely
''glamorous" in the outset might ultimately have terrible effects. Mr. Dasgupta
approached Ms. Bose, the Finance Manager and asked her to create a ‘‘worst-case"
model in relation to the new proposal for the new product launch in conjunction with
the company's Production and Marketing Divisions.

He had also stressed that this "worst-case" option is essential to counteract the
"overestimation" problem that had happened in the prior two product launch
scenarios, which had harmed the results. Ms. Bose had subsequently worked on the
plan and built such a "worst-case" model in cooperation with the appropriate
individuals from various areas of the organisation (as per the CEO's suggestion). As a
result, the next task is to conduct a thorough market survey/demand study to
analyze the prospective demand for such a new product on the market.

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Cost Analysis and Control Unit 6

While the marketing team is working on a market survey/demand research project, Ms.
Bose said she would do a basic exercise of figuring the ‘‘break-even point” based on the
‘‘worst-case" financial calculations she had previously generated. She added that if the
marketing research report concludes that the product's "average yearly market
demand" easily exceeds the "break-even threshold" (which she would calculate shortly);
the product launch (as currently planned by the CEO) will be a success. Mr. Dasgupta,
understandably, found a lot of potential in Ms. Bose's approach and asked her to do a
"breakeven analysis" exercise.

He acknowledged that this approach may assistance in visualizing and determining the
proposal's critical operating risk exposure. Ms. Bose has since performed a simple
break-even analysis (based on the "worst-case" financial assumptions) and provided the
"break-even" data.
Source-icmai.in

Discussion Questions:

1. Discuss the relevance of conducting break-even analysis for entities spanning

from small to large categories.

2. Discuss the limitations of breakeven analysis.

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Cost Analysis and Control Unit 6

6.9. TERMINAL QUESTIONS

SHORT ANSWER QUESTIONS

Q1. Define break-even analysis.

Q2. Define break-even charts.
Q3. Describe the scenario of multiple breaks even.
Q4. Define differential analysis.
Q5. Explain margin of safety.

LONG ANSWER QUESTIONS

Q1. List out the applications of breakeven analysis.

Q2. List out few uses of breakeven charts.
Q3. Explain the angle of incidence.
Q4. List out the potential information that a break-even chart can disclose.
Q5. Describe some of the features of differential analysis.

ANSWERS

SELF ASSESSMENT QUESTIONS

1. B. Variable cost line

2. False
3. Total cost line
4. C. All of the above
5. True
6. Fixed cost
7. C. All of the above
8. True
9. Differential cost
10. C. All of the above
11. False
12. Non-cash

TERMINAL QUESTIONS

SHORT ANSWER QUESTIONS

Answer 1: Breakeven analysis identifies the amount of revenue at which a company makes
precisely no money. All contribution margin gained at this time is required to cover the
company's fixed costs. When all variable expenditures are deducted from income, the
contribution margin is calculated. The breakeven threshold is reached when the

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contribution margin on each sale equals the overall amount of fixed expenses spent over
some time.

Answer 2: A break-even chart depicts the amount of sales volume when total expenditures
equal sales. Below this amount, losses will be incurred, while gains will be gained above
this point. Earnings, fixed costs, and variable costs are plotted on the y axis, while volume is
plotted on the x-axis.

Answer 3: Break-even analysis becomes more complicated when a corporation offers

many items or delivers many services since not all of the goods sold for the same price or
have the same costs: Each item has its profit margin. As a result, in a multi-product context,
the break-even threshold is determined by the mix of items offered.

Answer 4: Differential analysis another name in incremental analysis. Differential analysis

is a management accounting methodology in which we assess just the differences in sales,
expenses, and profits that occur as a result of a company choice rather than constructing
full income statements for each option.

Answer 5: The gap between the number of units sold in actual sales and the number of
units sold at breakeven is the margin of safety. After taking into account all of the fixed
costs and variable costs that the firm must pay, any income that gets your firm above
breakeven might be termed the margin of safety.

LONG ANSWER QUESTIONS

Answer 1:

• Cost analysis: Examine all fixed costs regularly to determine if any may be
removed. Examine variable expenses to determine whether they can be avoided,
as this enhances margins and lowers the breakeven point.

• Margin Analysis: Keep an eye on profit margins and drive sales of the highest-
margin products to lower the breakeven stage.

• Outsourcing: If an operation has a fixed cost, think about outsourcing it to

decrease the breakeven point by turning it into a per-unit variable cost.

• Pricing: Vouchers and other price cuts increase the breakeven threshold,
therefore limit or eliminate them.

• Technologies: Keep an eye on profit margins and drive sales of the highest-
margin products to lower the breakeven stage.

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Cost Analysis and Control Unit 6

Answer 2: Some of the uses of breakeven charts are:

• It provides you with comprehensive and easy-to-understand information: A break-

even map presents data in a rational way that shows the relationship or behaviour
of the various factors: prices, sale price, production level, and business earnings.

• The BEC depicts item profitability: Aside from the break-even point, where the
company is making no income and spending no revenue, the BE map depicts item
profitability and thus assists managers in deciding whether to shut down or
maintain a product or the firm overall.

• It illustrates how cost and sale price fluctuations influence earnings: The BE graphic
specifically depicts the effect of differences in fixed cost, variable cost, and selling
price on firm profits at different stages of manufacturing, aiding management in
making reasonable decisions.

Answer 3: It's an angle that develops as a result of the selling and cost line. The break-even
point, which indicates how effectively the organisation is producing a profit, is usually
when this angle begins to emerge. Angle of Incidence depicts profit growth or profitability
rate. Analysis of Cost-Volume-Profit (CVP analysis) is a strategy for determining the link
between costs, volume, and profit.

Answer 4: Beneficial information that can be derived using break-even charts is:

• The firm's likely earnings or losses at various units of output.

• The cost structure of variable and fixed costs.
• The production level at which the business breaks even, often known as the break-
even point.
• Reveals the margin of safety
• The angle of incidence- The angle formed by the intersection of total sales line and
total cost line. A wide-angle of incidence shows high profit and vice – versa.
• We can derive the PV ratio by dividing profit by margin of safety or dividing
contribution by sales.

Answer 5: Features of differential analysis are:

• Costs, income, and investment factors that apply to the issue on which the research
is performed serve as the basic data for differential cost analysis.
• The total or aggregate of differential costs is considered rather than the costs per
unit.
• Differential cost estimation is performed independently of accounting records.
• When considering the disparities in costs between two levels, absolute costs at each
level are less important than the disparity between the two. As a result, aspects of

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Cost Analysis and Control Unit 6

the cost that do not adjust but are the same with both of the alternatives are
overlooked.
• The differences are calculated using a standard starting point or position.
• The stage at which the variance between income and expense is the greatest, as
determined from a standard base point, decides which of many options to pursue.
• Historical or normal costs may be used to compute differential costs, but they must
be modified to meet the needs of future scenarios.
• The cost elements and aspects to consider in differential cost analysis can vary
depending on the issue and the solutions being studied.

6.10. SUGGESTED BOOKS AND E-REFERENCES

BOOKS:

• Michael E. Cafferky & Jon Wentworth, (2010), Breakeven Analysis: The Definitive
Guide to Cost-Volume-Profit Analysis, 1st edition, Business Expert Press.
• Chandra Sekhar, (2018), Break-Even Analysis: Break-even point, Determinants of
BEP, Break-even Chart, 1st edition, Kindle Store.
• Anna Coulling, (2013), A Complete Guide to Volume Price Analysis: Read the book
then read the market, 1st edition, Marinablu International Ltd.

E- REFERENCES:

• Break-Even Analysis | Cost Accounting, viewed on 21 May

2021,<https://www.accountingnotes.net/cost-accounting/break-even-
analysis/break-even-analysis-cost-accounting/10600>
• Breakeven analysis definition, viewed on 21 May 2021,
<https://www.accountingtools.com/articles/breakeven-analysis.html>
• Differential Analysis, viewed on 23 May 2021,
<https://xplaind.com/478812/differential-
analysis#:~:text=Differential%20analysis%20(also%20called%20incremental,inco
me%20statements%20for%20each%20alternative.>
• In Pursuit of Profit: Applications and Uses of Break-Even Analysis, viewed on 25
May 2021, <https://www.business.com/articles/in-pursuit-of-profit-applications-
and-uses-of-breakeven-analysis/>
• What Is a Break-Even Analysis?, viewed on 26 May 2021,
<https://articles.bplans.com/break-even-analysis/>

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