‘markets where it sells and where it purchases. tip between the volume and cost of production ined from the sales on the other. According sis indicates at what level cost and revenue role of break-even point is of particular which total revenue and total costs are is that point of activity where total revenues .” In case the firm produces and sells less it would incur losses, and if it produces int, it makes more profits. Thus, break- analysis as it helps the management in Jevels of sales. A break even chart may be aship of production and sales to profits”. A [-run relation of total cost and revenue to20.1 shows output Costs and revenue. ‘total revenue (TR) TR curve is linear Id be making profits. Since profit or loss occup the space between them is known as the Profit 20m of volume of output. The break-even poi be sold to earn enough revenue just to cover al Point is illustrated by means of Table # Rs. 100. And when the outputs eS to 150 units the total revenu? ’ Output where there is no profit the firm is making profit cast € revenue and average ih AR) covers ‘The545 tribution margin. So, the BEP will Of the output of the firm is equal ‘is Rs. 2 per unit and the average of output. is suitable only in the case of | point can be analysed only i n ratio to sales. ariable expenses are Rs- 8, ‘over and above its variable n margin is thus Rs. 12, sinee of fixed expenses level of output. The co8 is illustrated in Figure between the BEP a| Revenue (TR) ~ Total variable cost (7VC) Net Profit (NP) + Total fixed cost (TFC) ‘= TFC. This occurs at break-even point. From this rela, irts at this point. TRC) + TVC margin (ACM) can be used for finding the breay.. price and average variable cost. The break-even py; fixed cost (ACM = AFC). If we know the 4c t of assumptions. These are : ed into fixed and variable cost. It ignores with the physical volume of production, production are equal. No ‘unsold stocks p s the analysis unrealistic. relationship of output to is assumed to be consist! emand and product-mis: 10” i at fom the numerical example of table ie ming profit. Safety margin can 0° 1 547 seeounting data. Hence it suffers from many Mifically determined depreciation etc. lar be Period gives rise to costs only during that due to outputs of earlier periods. If the Maintenance cost of the subsequent period, € lack of perfect matching of output and cost to e in break-even analysis. This is because ges in output and sales. Besides, the Overtime, rendering the projection of quantity might be sold at that price. If prices change, then instead of one analysis. ort-run forecasts. d be limited. If too many products, asingle break-even chart, it would d and widely used method of profit ships. optimum output level etc. subject to fast changes inord to lose sales upto 40 percent of the present leve| ; Gan afford 10 Megative also i sales are less than the BEP. n am ‘should be increased in order to reach the point at which x ; te sn analysis may be used for determining the volume of gy, ‘The formula for this purpose !s . _Fixed cost x Target profit_ volume = Contribution margin per unit 5 fixes the profit as Rs. 100 with a given contribution margi, should be 250 units. Only at that level it gets a profit of g the output, the same result will be obtained. - slump, the firm will have to take a decision regarding, fore taking a decision the management has to consid toa reduction in contribution margin. Therefore, volun, previous level of profit. Reduction in price may or may ds on the elasticity of demand for the product. But the ay not be easily available. Assuming that the elasticity g thas to take decision regarding the increase of volume g of profit. The formula for determining the new volume duction in price, will be as follows: Total fixed cost + Total profit volume of sales should be 7000 units on the ose the firm decides to reduce the price from > a 333 units Maintain the target profit of Rs. 200 and quantity produced and sold must total cost. As a result, contribution ift the break-even point downwart tribution margins increase and the ness executive has to decideinis Rs, 63000, th Sit Present sale price i: cost ; ale price is Rs, 10 and the present & Per unit Boes up from Rs, 6 to Rs. 7, then the new 63000 3 ~ 21000 Units TRS. 6)=Rs, 11, tax on dats of due to an increase in the workers’ a thus push the break-even point upwards. To ‘Of sales volume or a new price has to be located F (ew fixed cost + Present fixed costs) Present sale volume 3. 5000 to Rs. 6000, the variable cost is Rs. within the firm or bought from at Rs. 40 each. If he decides to Total cost with |4— advertisement expenditure . 0 it a Fixed cost with et Pe = lem advertisement per year. If his ce fs expenditure , it is better to buy from outside ME ||) : + Fixed cost isi Under g Decisions. sof keen competition the firm has ig a vigorous campaign ° ment. The management an ie the effects of different leve s Ig expenditure and different mohelps the management to know the circum : tances where has to be taken. Thus it helps the manage," nix policy. The effects of an additional advertisement expenp ‘and after advertisement are shown in Fig. 20.5. it, nt cost pushes up the total cost curve by the amount of adveniy Figure 20.3, that with the advertisement expenditure, the breay to Or. e may be utilised to find out the effect of a change in ope d profits. For example, a company has the capacity to produce p..* fixed cost of Rs. 10 crores, the variable cost being 60 perce " d its productive capacity of output and sales from x al cost of Rs. 6 crores. By doing so, the firm’s sal he 50 crores within a reasonably short period of 1 ; helps the firm to take a decision regarding expan; -even point shifts upward. The comparative te Fixed cost ry Marginal contribution percent __ Rs. 10 crores 40% Rs. 16 crores = Rs. 25 croresfor policy making. the entire profit and loss statements for @ penis in the profit and loss statement. of producing the anticipated sales. Profit is 0 5 profit to the general economic jod. The general economic trends include icies and general price level etc. The n government publications. iI tool for profit planning and cost to changes in output. tool of profit forecasting, ‘These can be jointly used for v lod profit accounting in the tive Compromised” that go against profit- bility which is the valid et their jobs regardless of ive overstocking and tic deviationism. ‘company into several ans in his division. Of ment relates to the yr his operation. His