Break even analysis
- 2. Break Even Analysis:- It is the relationship between cost,revenue and profit. It is also known as cost volume profit analysis. The purpose of break-even analysis is to provide a rough indicator of the earnings impact of a marketing activity. The break-even point is one of the simplest yet least used analytical tools in management. The break-even point is a special case of Target Income Sales where Target Income is 0 (breaking even).
- 3. DEFINITION:- There is no net gain or loss. All cost that need to by paid by the firm are paid but the profit remains “zero” “Break even point (BEP) is the point at which cost or expenses and revenue are equal”
- 4. 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
- 5. Important things to be considered before conducting break- even analysis Fixed cost( FC) :— Costs not directly dependent on the variable, e.g., buildings, fixed overhead, insurance, minimum workforce cost Variable cost(VC ) :— Costs that change with parameters such as production level and workforce size. e.g., labor, material and marketing costs. Total cost, TC = Sum of fixed and variable costs. TC = FC + VC
- 6. TR & TC Table Units Price TR TC Situation 1 10 10 12 TR<TC 2 10 20 22 TR<TC 3 10 30 35 TR<TC 4 10 40 40 TR=TC Break Even Point 5 10 50 45 TR>TC 6 10 60 52 TR>TC 7 10 70 60 TR>TC L O S S p R O F I T
- 7. TR TC TFC
- 8. Computation /construction of BEP:- LINEAR COST-VOLUME-PROFIT ANALYSIS MODEL Where, marginal cost and marginal revenue are constant BEP can be directly computed in terms of total revenue(TR) and total cost (TC) TFC is Total Fixed Cost P is Unit Sale Price V is Unit Variable Cost X is BEP (in terms of unit sales)
- 9. 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 organization’s profitability Helpful in deciding about the substitution of new plants Helpful in sales price and quantity Helpful in determining marginal cost
- 10. 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.
- 11. CONCLUSION:- “Breakeven analysis is not a predictor of demand, so if you go into market with the wrong product or the wrong price, it may be tough to ever hit the breakeven point”