Break Even Analysis 20 Nov 08

BREAK EVEN ANALYSIS In narrow sense, BEA is concerned with determining BEP i.e. that level of production at which there is No Profit & No Loss. In broad sense, BEA is used to determine probable Profit or Loss at any given level of Production / sales.

Assumptions under Break Even Analysis  

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All costs can be segregated into fixed and variable Variable cost per unit remains constant i.e. it varies with the level of production Total Fixed Cost remains constant Selling Price per unit does not change with production level There is only one product. Or incase of multiple products the product mix remains constant. Volume of production equals volume of sales Productivity per worker does not change General price level remains constant

Uses of Break even Analysis 1. 2. 3. 4. 5. 6.

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Determining BEP Determining SP for a desired profit Determining Sales Volume for a desired return Determining Costs and Revenues at different levels Determining most profitable Sales Mix It studies difference in selling price in different markets Compares the profitability of various firms Helps in managerial decision making It studies increase or decrease in profit due to changes in fixed and variable costs

Methods of Break Even Analysis Break even Analysis can be performed by the following two methods: 1. Algebraic Calculation 2. Graphic Presentation ALGEBRAIC CALCULATION : Under this method using the following formula BEP is calculatedBEP = Total Fixed Cost / Contribution per unit BEP = Total Fixed Cost / Total Contribution * Sales Cash BEP = Cash Fixed Expenses / Contribution per unit.