Other semi-variable costs like fund, electricity, maintenance, transport etcVariable cost at any quantity of production/sale = variable cost per piece X QuantityVariable cost is represented by inclined line starting from (0,0)
Total cost of any point represents the sum of fixed cost and variable cost at that quantity.Total cost = Fixed cost + variable costTotal cost is represented by an inclined line starting from cost in Y axis (0.FC)
Sales revenue is represented by an inclined line starting from (0,0)
ANALYSIS OF BREAK EVEN CHART
1BREAK EVEN POINT (BEP)
Break even point is the point in BE chart where Sales Revenue = Total cost. It is represented a point where the Total cost line crossed the Sales Revenue line. At BEP, there is no loss and no profit.
2BREAK EVEN QUANTITY (BEQ)
The quantity of production/sales at BEP is termed as Break even Quantity
3BREAK EVEN COST/REVENUE
The sales revenue or total cost at BEP is termed as BE Revenue or BE cost
Profit at a particular Quantity isProfit = Sales revenue – Total cost for that Quantity. It represents the area between the salesrevenue line and total cost line after BEP in the BE chart
If sales revenue is less than total cost, the product is making a lossLoss= Total cost – sales revenue for that quantityIt is represented by the area between the two lines before BEP in the BE chart
6ANGLE OF INCIDENCE
It is the angle between sales revenue line and the total cost line. Large angle indicate higher rate of profit, means higher profits for small increase in sales.
7MARGIN OF SAFETYQUANTITY
Margin of safety (Quantity) = Present Quantity of Sale – BE QuantityThe importance of margin of safety is that it shows graphically the vulnerability of company’s profit due to changes in Quantity of Production/sale. If the distance or difference is large, even if there is a serious drop in production/sales, the profit will not be affected much. If the distance isshort, a small drop in production /sale will lead to loss for the company. Margin of safety can beexpressed in absolute values or as %age of the current level of production/sale.
MARGIN OF SAFETY (Rs)