Called as cost volume profit analysis, used by the firm (a).

To determine the level of operations necessary to cove

break even point is the level of sales necessary to cover all operating

The first step in finding the operating break even point is to divide the cost of goods sold and operating expenses in
contractual , rent for example, is a fixed cost. Variable cost vary directly with sales and a

The Algebraic Approach

EBIT = (P*Q) - FC - (VC*Q)

Simplifying this equation:- EBIT = Q*(P-VC)-FC
where
P - Sales Price per unit
Q - Sales quantity in units
FC - Fixed Cost
VC - Variable Operating Cost per period

The operating break even point is the level of sales at which all fixed ald variable operating costs are

Q = FC/P-VC
Q is the company's break even point

ex: Assume that Kumaran's Posters, a small poster retailer, has fixed operating cost of Rs. 2,50

FC per unit 2500

P(Sales price per unit) 10
VC per unit 5
EBIT(break even point in units) 500

Changing Costs and the Operating Break Even Point

Assume that Kumaran's posters, wishes to evaluate the impact of several options -

1. Increasing Fixed Operating cost to Rs. 3000

Sales price per unit 10

Variable operating cost per period 5
BEP (in Units) 600

3. Fixed Cost 2500

Increasing Sales Price 10
Increasing Variable Cost 7.5
BEP 1000
 Sensitivity of Break Even Point to Increase in Key Break Even Variables
Increaase in Variable Effect on BEP
FC Increase
Sales Price decrease
VC increase
e level of operations necessary to cover all costs and (b). To evaluate the profitability associated with various levels of sales. Th
f sales necessary to cover all operating costs. At that point, before interest and taxes equals to zero.

f goods sold and operating expenses into fixed and variable operating costs. Fixed costs are a function of time, not sales volum
able cost vary directly with sales and are a function of volume, not time, shipping costs for example are a variable cost.

Operating Lever

Operating
Leverage

fixed ald variable operating costs are covered, the level at which EBIT are equals to Rs. 0. Q is the firm's operating breakeven

etailer, has fixed operating cost of Rs. 2,500 its salesprice per unit(poster) is Rs. 10 and its variables operating cost per unit is Rs. 5. At how

Item Algebraic Representaion Verifying(for Q = 500) Q = 450 units

Sales Revenue (P*Q) 5000 4500
Less: Fixed Operating Costs FC 2500 2500
Less: Variable Operating Costs (VC*Q) 2500 2250
Earning Before Interest and Taxes EBIT 0 -250
Break even point Loss
en Point
pact of several options -

2. Fixed Cost 2500

Increasing Sales Price 12.5

Variable Cost 5
BEP 333.33

4. Increasing Fixed cost 3000

Increasing Sales Price 12.5
Increasing Variable Cost 7.5
BEP 600
arious levels of sales. The firms operating

n of time, not sales volume and are typically

re a variable cost.

Operating Leverage, Costs and Breakeven Analysis

Item Algebraic Representaion
Sales Revenue (P*Q)
Less: Fixed Operating Costs FC
Less: Variable Operating Costs (VC*Q)
Earning Before Interest and Taxes EBIT

m's operating breakeven point.

st per unit is Rs. 5. At how many units EBIT will be zero?

Q=550 units
5500
2500
2750
250
Profit