Break even and Cost Volume

Profit Analysis

Break Even Analysis

Break Even analysis (BEA) is a method of
studying the relationship among sales
revenue, variable cost and fixed cost.
It is done to determine the level of operation
at which all the costs are equal to its sales
revenue i.e. No profit No loss situation.

 Definition
It is the Study of the mathematical relationship
between costs and sales revenue, under a given
set of assumptions regarding the firm's fixed
costs and variable costs.
Break-even analysis is a supply-side analysis; that
is, it only analyzes the costs of the sales.
It does not analyze how demand may be affected
at different price levels.

Formula
Break Even Point =
Fixed Cost
Price per unit Variable cost

Example
If it costs Rs. 50 to produce a Pizza, and there are
fixed costs of $1,000, the break-even point for
selling the Product would be:
If selling for Rs. 100: 20 Pizzas (Calculated as
1000/(100-50)=20)
If selling for Rs. 200: 7 Pizzas (Calculated as
1000/(200-50)=6.7)

Assumptions and Limitations

1. Difficult to classify semi-variable expenses
into VC or FC.
e.g. Costs of supervision and inspection,
repairs & maintenance.
2. Fixed costs may vary in long run.
3. Variable costs are not variable with the
output.
4. BEA shows that production units = sales unit,
but in practice inventory will always exists.

5. To increase the sales it necessary to change

the selling price.

Profit Volume Ratio

It is graph that shows the relationship
between a companys earning (or losses ) and
its sales.
Uses:- It shows how different levels of sales affect
the company.
- It helps Co. to establish sales goals and to see
whether the project is profitable or not.

Formula
P/V Ratio =

Margin of Safety
It an excess of companys actual sales revenue
over the breakeven sales revenue.
Example: If a Co. has to sell 100 items in order to make
up for the costs it has incurred then it would
obviously not produce only 100 but something
more like 120.