# BREAK EVEN ANALYSIS

Definition “A break even analysis indicates at what level cost and revenue are in equilibrium” Also known as Cost-Volume-Profit[CV-P] analysis. A breakeven analysis is used to determine how much sales volume your business needs to start making

BREAK EVEN ANALYSIS

BREAK EVEN POINT [BEP]
• Point of Zero Profit Cost of the firm = Revenues ASSUMPTIONS • Sales price of products is assumed constant. • All costs are either perfectly variable or absolutely fixed over the entire period of production. • Volume of production = volume of sales • Assumption of stable product mix. • All revenue is perfectly variable with the physical volume of production.

METHODS TO CALCULATE BEP • Break even chart • Algebraic method

BREAK EVEN CHART

NON-LINEAR CHART

ALGEBRAIC METHOD
• • • • TR=(P)(Q) TC=TFC+TVC TC=TFC+AVC(Q) At break even, TR=TC

QB= TFC/(P-AVC) Where QB=break-even quantity TFC= total fixed cost P=price AVC= average variable cost

BREAK EVEN SALES VALUE
SB=TFC/CONTRIBUTION RATIO Where TFC=total fixed cost CONTRIBUTION RATIO= TR-TVC/TR Where TR=total revenue TVC=total variable cost

Problem
A Company has fixed costs of \$3000 this period. Direct labor is \$3.25 per unit, and material is \$ 1.75 per unit. The selling price is \$ 12.50 per unit. Break-even point in dollars and in units(?) • Fixed Cost=\$3000 • Variable Cost=\$5.00(3.25+1.75) • No of Units=50 • Unit Price=\$12.50

Breakeven Analysis
\$12,000 \$10,000 COST-VOLUME-PROFIT \$8,000 \$6,000 \$4,000 \$2,000 \$0 0 50 100 150 200 300 350 450 500 550 600 700 750 250 400 650 800

NET UNITS (000)

USES
• Helps in determining the optimal level of output. • Determines the minimum cost for the given level of output. • Make or buy decisions. • Helps in plant expansion/contraction decisions. • Finding the selling price which would prove most profitable to the firm.

MANAGERIAL USES
• Safety Margin Decisions Safety margin=[(salesBEP)/sales]*100 • Target Profit

• Technique of forecasting

LIMITATIONS
• • • • Adjustments in factor prices Unrealistic assumptions Static Applicable only for proper managerial accounting techniques • Selling costs

CONCLUSION
• It is simple, easily understandable and quite inexpensive. • Focuses attention on fundamental relationships. • Can be used for various purposes. • Suitable to those industries which are not subject to fast change in technology and input prices.

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