Break Even Analysis

BREAK EVEN ANALYSIS PRESENTED BY: Aditya Agarwal Dhingra Mohit Nischinth Bharadwaj Sindhu Chandra Shweta Madaan K.Vyshali

BREAK EVEN ANALYSIS

Definition “A break even analysis indicates at what level cost and revenue are in equilibrium” Also known as Cost-Volume-Profit[CV-P] analysis. A breakeven analysis is used to determine how much sales volume your business needs to start making

BREAK EVEN POINT [BEP] • Point of Zero Profit Cost of the firm = Revenues ASSUMPTIONS • Sales price of products is assumed constant. • All costs are either perfectly variable or absolutely fixed over the entire period of production. • Volume of production = volume of sales • Assumption of stable product mix. • All revenue is perfectly variable with the physical volume of production.

METHODS TO CALCULATE BEP • Break even chart • Algebraic method

BREAK EVEN CHART

NON-LINEAR CHART

ALGEBRAIC METHOD • • • •

TR=(P)(Q) TC=TFC+TVC TC=TFC+AVC(Q) At break even, TR=TC

QB= TFC/(P-AVC) Where QB=break-even quantity TFC= total fixed cost P=price AVC= average variable cost

BREAK EVEN SALES VALUE SB=TFC/CONTRIBUTION RATIO Where TFC=total fixed cost CONTRIBUTION RATIO= TR-TVC/TR Where TR=total revenue TVC=total variable cost

Problem A Company has fixed costs of $3000 this period. Direct labor is $3.25 per unit, and material is $ 1.75 per unit. The selling price is $ 12.50 per unit. Break-even point in dollars and in units(?) • Fixed Cost=$3000 • Variable Cost=$5.00(3.25+1.75) • No of Units=50 • Unit Price=$12.50

Breakeven Analysis $12,000

$8,000 $6,000 $4,000 $2,000

NET UNITS (000)

800

750

700

650

600

550

500

450

400

350

300

250

200

150

100

50

$0 0

COST-VOLUME-PROFIT

$10,000

USES • Helps in determining the optimal level of output. • Determines the minimum cost for the given level of output. • Make or buy decisions. • Helps in plant expansion/contraction decisions. • Finding the selling price which would prove most profitable to the firm.

MANAGERIAL USES • Safety Margin Decisions Safety margin=[(salesBEP)/sales]*100 • Target Profit

• Technique of forecasting

LIMITATIONS • • • •

Adjustments in factor prices Unrealistic assumptions Static Applicable only for proper managerial accounting techniques • Selling costs

CONCLUSION • It is simple, easily understandable and quite inexpensive. • Focuses attention on fundamental relationships. • Can be used for various purposes. • Suitable to those industries which are not subject to fast change in technology and input prices.

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