Break Even analysis in financial management. pptx

Break even analysis in Finance Management

1. Break Even analysis

2. Break even point is an important measure for entrepreneurs and proponents in deciding the validity of a new project. BEP (Break Even Point) of a firm is an important factor in accessing its profitability . BEP is the point of sales volume when, Total Revenue(sales) = Total Expense(costs) @ BEP Ex : If Rs. 1000 is the sales and Rs.1000 is the costs, then No profit or No loss is generated @ BEP BEP : Refers to the level of output which evenly breaks the costs and revenues

3. Profit, Loss If sales > costs then PROFIT If sales < costs then LOSS

4. The Break Even analysis also determines the margin of safety i.e. excess of actual sales, over the break even sales, so that bankers can know how sensitive a project is to recession. An important factor in determining the feasibility of the project and its ability to absorb the ups and downs in the economy. Units of Sale Volume Terms of Money Value Percentage of Estimated Capacity BEP Computation

5. BEP (In terms of volume): BEP (in units) = Fixed Cost (units) Total Contribution i.e. Total Contribution = Selling price per unit – Variable cost per unit BEP (In terms of money value or sales): BEP (money value) = Fixed Cost x selling price (rupees) Total Contribution BEP (In terms of capacity): BEP (%) = Fixed Cost (%) Total Contribution

6. Calculate the BEP in units and sales Fixed cost = Rs.9000 Selling price = Rs.5 per unit Variable cost = Rs. 3 per unit BEP in units = Fixed cost Selling price (per unit) – Variable cost (per unit) = 9000 5 – 3 = 4500 (units) BEP (sales/money value) = BEP (in units) x Selling price = 4500 x 5 = Rs. 22500/