3. INDEX
SR.NO. TOPIC PAGE NO.
1. INTRODUCTION 04
2 DEFINITION 05
3 CALCULATION OF BREAK EVEN POINT 06
4 IMPORTANCE 09
5 ASSUMPTIONS 10
6 MARGIN OF SAFETY 11
7 ADVANTAGES & DISADVANTAGES 12
8 UTILITY 13
9 CONCLUSION 15
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4. INTRODUCTION
In the break-even point (BEP) is the point at which cost or
expenses and revenue are equal: there is no net loss or gain, and one
has "broken even". A profit or a loss has not been made,
although opportunity costs have been "paid", and capital has
received the risk-adjusted, expected return. In short, all costs that
need to be paid are paid by the firm but the profit is equal to zero.
For example, if a business sells fewer than 200 tables each month, it
will make a loss, if it sells more, it will be a profit. With this
information, the business managers will then need to see if they
expect to be able to make and sell 200 tables per month. If they think
they cannot sell that many, to ensure viability they could:-
Try to reduce the fixed costs (by renegotiating rent for example, or
keeping better control of telephone bills or other costs)
Try to reduce variable costs (the price it pays for the tables by
finding a new supplier)
Increase the selling price of their tables.
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5. DEFINITION
Break even analysis is that point of capacity at which operations pass
from profits to losses or vice versa .Break even are the mirror of business,
nothing less, & nothing more.
The study of the total cost, total revenue, & output relationship is known as
break even analysis. It can be also termed as cost volume profit. It is also
termed as cost volume profit analysis.
According to Horngern: - The break even analysis is that point of activity
(sales volume) where total revenue and total expenses are equal, it is the point
of zero profit.
Thus, breakeven point indicates a position or level of output in which
revenues and costs break evenly, i.e. a stage of no profit and no loss. A
business will have profit only when its volume of sales is more than
breakeven point.
The break-even point can be defined as a point where total costs (expenses)
and total sales (revenue) are equal. Break-even point can be described as a
point where there is no net profit or loss.
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6. Calculation of Break-even Point
There are three methods for the calculation of Break Even Point.
1. Equation Technique
2. Contribution Marginal Technique
3. Graphic Technique
Equation Technique
The equation method centers on the contribution approach to the income
statement.
The format of this statement can be expressed in equation form as follows:
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7. Sales = Variable Cost + Fixed Cost + Profit
Profit = (Sales − Variable Cost) − Fixed Cost
Profit = Contribution – Fixed Cost
PROBLEMS
Fixed cost = Rs. 240000
Sales per unit = Rs. 20
Variable cost per unit =Rs. 8
Calculate BEP in units, P/V ratio, BEP (in Rs.)
BEP (in units) =fixed cost/contribution
= fixed cost/sales-variable cost
= 240000/20-8
= 240000/12
BEP (in units) = 20000
P/V ratio = contribution/sales * 100
= 12/20*100
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8. = 60%
BEP (in Rs.) = fixed cost/p/v ratio
= 240000/60%
=Rs. 400000
Fixed cost = Rs.90000
P/V ratio = 25%
Sales =Rs. 600000
Calculate BEP(in Rs.) and margin of safety
BEP (in Rs.) = Fixed cost/ P/V ratio
= 90000/25%
= Rs.360000
MOS = Actual sales – BEP sales
= 600000 – 360000
= Rs.240000
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9. IMPORTANCE OF BREAK EVEN ANALYSIS
One of the important indicators of success of the start-up company is the time
from starting. The business till the moment when revenues of product sales
equals the total costs associated with the sale of product – it is also called
break-even point. In other words profit = 0. Breakeven analysis is accounting
tool to help plan and control the business operations.Breakeven point analysis
is a very important tool. We don't make a profit until we cover all the variable
costsincurred, and all the fixed costs. The point at which this is reached is
known as the "breakeven point". And the more we sell after this point is
reached, the more profit is made.
Break-even point represents the volume of business, where company’s total
revenues (money coming into a business) are equal to its total expenses (total
costs). In its simplest form, breakeven analysis provides insight into whether
or not revenue from a product or service has the ability to cover the relevant
costs of production of that product or service.
TOTAL REVENUE= TOTAL COSTS
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10. ASSUMPTION OF BREAK EVEN POINT
The break even analysis is based on three assumptions:-
Monthly fixed costs.
Average per-unit sales price (per-unit revenue).
Average per-unit cost.
(1) Monthly fixed costs: -Technically, a break-even
analysis defines fixed costs as costs that would continue
even if went broke. If averaging and estimating is difficult,
use Profit and Loss table to calculate a working fixed
costestimate, it will be a rough estimate, but it will provide
a useful input for a conservative Break-even Analysis.
(2) Average per-unit sales price (per-unit revenue):-
This is the price that you receive per unit of sales. Take into
account sales discounts and special offers. The most
common questions about this input relate to averaging
many different products into a single estimate.The
analysisrequires a single number, the vast majority of
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11. businesses sell morethan one item, andhave to average for
their Break-even Analysis.
(3) Average per-unit cost:-This is the incremental cost, or
variable cost, of each unit of sales. Forecast for retail,
service and distribution businesses, use a percentage
estimate, e.g., a retail store running a 50% margin would
have a per-unit cost of .5 and
Per-unit revenue of 1.
MARGIN OF SAFETY
It indicates the strength of a business. High margin of safety indicates that
profits will be earned if there is a fall in selling price on the other hand if the
margin of safety is small a decline in sales value will be a matter of great
concern to the management in such situation management may require to take
the following decisions:-
Increase the selling price.
Increase the level of activity.
Reduce cost.
Substitute the existing product with more products with more
profitable product. It is also popularly known as MS it is the
excess of actual sales of production volume over the breakeven
point.
If the MOS is large the business prospects are strong. If the MOS
is small the business prospects are weak. The MOS could be
improving by increase in the selling price which improve sales
revenue or by reducing the cost.
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12. ADVANTAGES OF BREAK EVEN ANALYSIS
The concept is of great asset to the people who are accountable
for forecasting results.
It is an important tool for effective decision making to
accomplish the desired objectives.
The impact of variations in sales and cost of production on profit
can be determined.
Provides more realistic basis for policy making.
The point where from the payment of dividends should start can
be determined by BEA
For some predetermined policy, BEA can give indications about
the desired selling price.
Easy to understand and use.
Profit and loss is easy to calculate at different levels of output.
The impact of a change to cost can be measured by changing in
TC line.
Can measure the impact of a price change by moving the TR line.
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13. Allows the company to carry out a “what if analysis”?
DISADVANTAGES OF BREAK EVEN ANALYSIS
Is too simplistic that all prices/ costs are constant.
Any conclusions drawn are only as accurate as the data they are
based on.
Assumes that all output is sold.
LIMITATIONS OF BREAK EVEN ANALYSIS
With variation in the prices of the items or services, which
also depends on the factors, affecting its demand and supply,
will certainly affect the demand of its commodity. This
phenomenon is not covered in break even analysis.
The fixed cost may not remain constant as well as the variable
costs may not vary in fixed proportions at different levels of
output.
Consumers may give certain discount on purchases to
promote sales. Thus revenue may not be perfectly variable
with level of sales output.
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14. The assumption of producer’s market phenomenon may not
hold good for all types of commodities.
A shift in product mix may change the breakeven point.
UTILITY OF BREAK EVEN ANALYSIS
It is the most useful technique of profit planning and control. It is a device to
explain the relationship between the cost volumes profit. The utility of break even
analysis are the following:-
Provides detailed and understandable information:-Break
even analysis is a simple concept to present and interpret
accounting data. Many business executives and other are
unable to understand accounting data contained in the
financial statements and reports but break even visualizes
information very clearly.
Profitability of product and business can be known: - The
profitability of business can be known with the help of break
even chart.
Effects of changing of costs and sales price can be
demonstrated: - The changes of fixed and variable costs at
different levels of production and profits can be
demonstrated.
Cost control can be analyzed: - The relative importance
fixed in the total cost of the product can be analyzed and if
the total costs are high they can be controlled by the
management.
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15. Economy and efficiency can be affected: - The capacity can
be utilized to the fullest extent and economics of scale and
capacity utilization can be affected. Comparative plant study
can be studied on break even chart.
Diagnostic Tools: - It indicates the management the cause of
increasing breakeven point and falling profit the analysis of
these causes will reveal that what action should be taken. If
breakeven point as a percentage of capacity .
CONCLUSION
o We come to conclusion that BEP is most important for all the business.
o Because it show that either they have to continue their business or not.
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