Break even analysis

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Presented By :-
Shubham Mandloi

•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.
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Break-even analysis is also called as Cost-volume
profit analysis, since it is based on the relationship
among total cost, total revenue, and profits at
various levels of output.
Also it called as Contribution marginal analysis.
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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.
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 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 ) 5

 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)
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 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
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TR
TC
TFC
Revenue&Cost
E
Q
O
F

 P = Price per unit of commodity Sold
 Q = Quantity Produced and sold
 FC = Fixed Cost
 VC = Variable Cost
 TR = Total Revenue
 TC = Total cost
 QB = Break even Quantity
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Equate total revenue and total cost functions
and solve for QB
TR = P x Q
TC = FC + (VC x Q)
TR = TC
P x QB = FC + VC x QB
(P x QB) – (VC x QB) = FC
QB (P – VC) = FC
QB = FC/(P – VC),
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 Suppose that your fixed costs for producing 1,00,000 product
were Rs.30,000 a year.
 Your variable costs are Rs.2.20 materials, Rs.4.00 labour, and
Rs.0.80 overhead, for a total of Rs.7.00 per unit.
 If you choose a selling price of Rs.12.00 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 Rs.12.00 before your business will start to
make a profit.
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 Break-even output depends on following Factors :-
I. Price Per Unit of Product
II. Variable Cost per unit
III. Fixed cost on capital and equipment incurred by a
firm
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 Helpful in deciding the minimum quantity of sales
 Helpful in the determination of tender price
 Helpful in examining effects upon organization’s profitability
 Helpful in deciding about the substitution of new plants
 Helpful in sales price and quantity
 Helpful in determining marginal cost
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 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. 14

Break even analysis

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Break even analysis