BREAK EVEN ANALYSIS BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS

1. BREAKEVEN ANALYSIS

2. BREAKEVEN ANALYSIS
•Also known as Cost-Volume –Profit Analysis
OR Marginal costing
•Itistheanalysisofthreevariablesviz.Cost,
VolumeandProfit
•Thisanalysisexplorestherelationshipexisting
amongstcost,revenue,activityleveland
resultingprofit
•Helpfulinpredictinghowthechangesin
costsandsalesvolumeinfluenceprofit

3. BREAK EVEN ANALYSIS an overview
Inanarrowsense“Itreferstoasystemof
analysiswhichdeterminesthelevelsof
Operations/productionrequiredforanenterprise
sothatitneitherearnsprofitnorsuffersfroma
loss”
Inabroadsense“Itreferstoasystemof
analysisthatcanbeusedtodeterminethe
probableprofitatanylevelofactivity”

4. Types of costs involved
1.Fixed cost
Cost which does not vary with the level of the activity
or no. of units produced
Eg: Executive salaries, Rent, insurance etc.

5. 2.Variable cost
Cost which varies in direct proportion with the
level of the activity or the no.of units produced
Eg: Cost of material , packaging cost, sales
commission etc.

6. 3. Semi variable cost
It is a combination of fixed and variable
costs
Partly affected by the variation in the level of
the activity
Will not vary in the same proportion of the
activity level
It differs at different levels of the activity
Eg: Telephone bill,cost of gas,electricity etc.

7. Semi Variable Cost
** Not necessary that it increases in step manner
** It can also be a curve sometimes

8. Semi variable costs
•It has two components
–Fixed component
–Variable component
C V P Analysis takes into account
The Total cost (fixed and variable)
Total revenue
Desired profits with the sales volume
Fixed component of Semi Variable cost will be added to fixed cost and
Variable component will be added to Variable cost

9. Assumptions made in Break even Analysis
•Volume is the only cost driver
•Expenses can be classified as fixed and variale
•CVP relations are linear over a wide range of
production and sales
•Unit sales price, unit Variable cost and the
total fixed expenses will not vary with in the
relevant range

10. Assumptions contd…
•The relevant range of volume is specified
•There is a proper synchronisation between
the production and the sales.This assumes
that the everything produced is sold and there
is no change in the inventory level
•The firm deals with only one product or the
sales mix remains unchanged

11. Break even chart
800200
50000
400
1000
580
150000
100000
200000
Output/ Sales volume
Cost and Sales Revenue (Rs.)
Fixed cost
Break even point

12. BEP
“ Break even point is the level of activity( Sales
volume) where total revenue and total
expenses are equal”
It is the output or the level of the activity
where the enterprise neither earns profit nor
incur any loss
It shows the minimum operating level below
which it is dangerous to fall

13. Important terms in BEP analysis
•Contribution /Contribution margin
= Total revenue –Total Variable cost
or
Total sales –Total Variable cost
It is the tool which shows the income
available from the sale process to pay the
fixed cost
Once the fixed cost is paid the result will be
profit

14. •The contribution can also be defined as “ a
measure of economic value that tells how much
the sale of one unit of the product will contribute
to cover the fixed costs, with the remainder going
to result in profit”
•i.e. Contribution/ unit
= (selling price/unit ) –(Variable cost/unit)

15. Contribution Ratio
•Contribution ratio =
•It is used for comparing the profitability of
several products with in a production line and
the profitable products can be identified
•Any change in the contribution will have
complete impact on profit

16. 800200
50000
400
1000
580
150000
100000
200000
Output/ Sales volume
Cost and Sales Revenue (Rs.)
Fixed cost
Break even point
Contribution

17. •Profit
= Sales –Total cost
i.e = Sales –( Total variable cost –total
fixed cost)

18. •Sales -------xxxxx
− Variable cost------- xx
Contribution -------xxxxx
− Fixed cost-------xx
PROFIT -------xxxx

19. Profit = ( S –V)Q –F.C
S = selling price/ unit
V = Variable cost/unit
Q = No of units to be sold to attain the desired profit
ThereforeQ=

20. Example :1
•A company wants to produce a new mountain
bike called YAMAHA elevator and has forecast
the following information
–Price/ bike ------Rs. 1,25000
–Variable cost / Bike -----Rs. 45,000
–Fixed cost related to production ----Rs.50,000000
–Targeted profit = Rs. 10,0000000
–Estimated sales = 1500 bikes
Determine the no.of bikes needed for the targeted
profit

21. Example 1
•Solution
No of bikes to be sold (Q)
=
= 1875 bikes

22. Profit volume (P/V) Ratio
or
CONTRIBUTION MARGIN RATIO
•It is the ratio of contribution to sales revenue
or turn over
•P/v ratio =
OR

23. Other equations for p/v ratio
P/v =
P/v =
P/v =

24. Other equations for p/v ratio
P/V =
∵
Contribution-Fixed cost = Profit
P/v ratio can be considered as the % by which the revenue exceeds the
variable cost

25. Example 2
•Acompanywantstoproduceinduction
motorsandhasthefollowingforecast
informationsavailable
•Price/ motor----------Rs.800
•Variable cost----------Rs. 300
•Fixed cost ----------Rs.55,00,000
•Targeted profit----------Rs.2,00,000
•Estimated sales----------12,000
Check the P/Vratio

26. Solution Ex:2
Total revenue = 800 x 12,000
= Rs.96,00,000
Total variable cost= 300 x 12,000
= Rs. 36,00,000
Contribution = Revenue –V.C
= Rs. 96,00,000 –
Rs. 36,00,000
= Rs. 6,000,000

27. Ex:2 Soln.
•P/V Ratio =
= .625 = 62.5%
i.e it is giving a margin of 62.5% of the sales
More the value of P/v Ratio more will be the
profit

28. Uses of P/V ratio
•To Determine of B E P
•To know profit for given sales
•To know the sales volume for achieving
desired profit
P/v ratio can be increased by
Increasing the selling price
Changing the mix of the sales
Reducing the variable cost

29. EQUATIONS TO FIND BEP
•@ BEP
(Sales price/unit ) X Output(Q)
= (Variable cost/unit) X Q + Fixed cost
∴ Fixed cost (F.C) = ( S.Pper unit –V.C Per unit) Q
∴BEP (Q) In terms of units =
i.e. =

30. BEP in terms of Sales Revenue
•BEP = X Unit selling price
i.e. =

31. Equations to find BEP
•If a banker provides term loan to the
industrial unit,from the banker’s point of view
BEP =

32. Target sales volume
•Target sales volume=

33. Example:3
•Sales 5000
•Sales Price/ unit =Rs.50
•VC/ unit = Rs.30
•Fixed cost = Rs.35,000
•How many units have to be sold to cover up
Fixed cost as selling one unit gives a margin of
20?

34. Example 3 soln.
•@BEP
•FC = Contribution/ unit X Break even output (Q)
∴ BEP (Q) IN UNITS = FC/ CM
= 35,000/ 20
= 1750 Units
BEP in terms of sales = 1750 x unit selling price
= 1750 X 50
= Rs.87,500

35. Angle of Incidence

36. MARGIN OF SAFETY
Margin of safety = Actual sales –Sales at the Break Even
Point
i.e. 40000-25000 = 15,000 units

37. Margin of safety in terms of sales revenue
M O S = Target Revenue –Break even revenue

38. MOS as %
•Margin of safety (%) =
X 100%
X100%

39. Margin of safety
What is it’s
importance?
Itrepresents“ByHowmuchamounttheactualorbudgeted
salesshouldbegreaterthantheBEPsalessothatthe
companywon’tlandupinlossesincaseduetorecessionor
lowersales”
It shows “ if the sales falls, how much it can fall down
before the enterprise start incurring losses”

40. Margin of safety What is
it’s importance?
MOSisverymuchusefulforenterpriseifitwantsto
know“howmuchsafetylevelithas?”todefendrecession
orthefallinsalesvolume
MOS represents the strength of the business

41. Example 4
Refer the example 3 and find out the MOS
MARGIN OF SAFETY = Actual sales –BEP Sales
Actual sales
= x100%
= 65%
Even if the sales (5000) decreases by 65%
the business won’t face any losses

42. •Profit can be determined directly w.r.to margin
of safety and P/V ratio
•i.e. Profit=(MOS)in units X Contribution
margin/unit

43. •Safety margin( Amount) can also be found out
as
OR

44. EFFECT OF INCREASE IN FIXED
COST ON BEP

45. EFFECT OF INCREASE IN VARIABLE
COST ON BEP

46. EFFECT OF INCREASE IN SALES
PRICE ON BEP

47. •BEP IS USEFUL
1. To find a suitable product mix
2. To find out the sales required to reach a
desired revenue
3.To find out the profits at certain price
levels and sales
4.