Break-Even Analysis

PRESENTED BY
J.K.Nanda Deepak Singh Sadhana Kamble Pradeep Ramkyarani Tiken Singh

INTRODUCTION
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit. The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.

BREAK EVEN CALCULATER

Fixed Cost: The sum of all costs required to produce the first unit of a product. This amount does not vary as production increases or decreases, until new capital expenditures are needed.

Variable Unit Cost: Costs that vary directly with the production of one additional unit. Expected Unit Sales: Number of units of the product projected to be sold over a specific period of time.
Unit Price: The amount of money charged to the customer for each unit of a product or service.

Total Variable Cost: The product of expected unit sales and variable unit cost. (Expected Unit Sales * Variable Unit Cost ) Total Cost: The sum of the fixed cost and total variable cost for any given level of production. (Fixed Cost + Total Variable Cost )

Total Revenue: The product of expected unit sales and unit price. (Expected Unit Sales * Unit Price )
Profit (or Loss): The monetary gain (or loss) resulting from revenues after subtracting all associated costs. (Total Revenue Total Costs)

BREAK EVEN POINT: Number of units that must be sold in order to produce a profit of zero (but will recover all associated costs).
Break Even Point (IN UNIT)= Fixed Cost /S. Price- Variable Unit Cost Break Even Point (in Rs)=Fixed Cost/ S. Price-Variable unit Cost*Units

For example, suppose that your fixed costs for producing 100,000 product were 30,000 rs a year. Your variable costs are 2.20 rs materials, 4.00 rs labour, and 0.80 rs overhead, for a total of 7.00 rs per unit. If you choose a selling price of 12.00 rs for each product, then: 30,000 divided by (12.00 - 7.00) equals 6000 units. This is the number of products that have to be sold at a selling price of 12.00 rs before your business will start to make a profit.

Break-Even Analysis
Costs/Revenue

TR

TR

TC

VC

TheAs output is point Break-even Totallowercosts The total the The revenue is occurs where total generated, firm Initially a determined the therefore less revenue equalsby the price,will incur the total firm charged and will incur fixed pricethe firm, in (assuming costs thecosts variable total steep these do costs, the quantity sold this accurate would example thesethis will not vary revenue curve. again depend on have to sell Q1 tobe forecasts!) is the directly or bythe output with determined sales. generate sufficient amount FC+VC sum of forecast expected produced revenue to cover its sales costs. initially.

FC

Q1

Output/Sales

Break-Even Analysis
Costs/Revenue
TR (p = 3)
TR (p = 2)

TC

VC

If the firm chose to set price higher than 2 (say 3) the TR curve would be steeper they would not have to sell as many units to break even

FC

Q2

Q1

Output/Sales

Break-Even Analysis
Costs/Revenue
TR (p = 1)
TR (p = 2)

TC

VC

If the firm chose to set prices lower (say 1) it would need to sell more units before covering its costs

FC

Q1

Q3

Output/Sales

Break-Even Analysis
Costs/Revenue
TR (p = 2)

TC VC

Profit

Loss FC

Q1

Output/Sales

Break-Even Analysis
Costs/Revenue
TR (p = 3)
TR (p = 2)

TC VC

Margin of A higher price safety shows how far lower would sales can break the fall before Assume losses made. If even1000sales point current and Q1 = andQ2 sales Q2 =the at 1800, could fall by margin of 800 units before a safety would loss would be widen made

Margin of Safety FC

Q3

Q1

Q2

Output/Sales

USES OF BREAK EVEVN POINT

Helpful in deciding the minimum quantity of sales Helpful in the determination of tender price Helpful in examining effects upon organizations profitability Helpful in deciding about the substitution of new plants Helpful in sales price and quantity Helpful in determining marginal cost

LIMITATIONS
Break-even analysis is only a supply side (costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices. It assumes that fixed costs (FC) are constant It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period. In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant.

CONCLUSION
Break even analysis should be distinguished from two other managerial tools :Flexible budgets and standard cost the variable expense budget is built on the same basic cost output relationship, but it is confined to costs and is primarily can concerned with the components of combined cost since the purpose is to control cost by developing expenses standards that are flexibly to achieving rate this purpose often leads to measures of achieving that differ among costs and operation so that they cant be readily added or translated in to an index of output for the enterprise as a whole standard costs on the other hand on.