Break-Even Analysis

PRESENTED BY
PALAK
 INTRODUCTION

 The break-even point is when income

matches expenditures. It originated in
the economic concept known as the
'point of indifference.' This point shows
the quantity of some good at which the
decision maker can be indifferent. At
this quantity, the benefits and costs
are precisely balanced.
 BREAK-EVEN POINT
 In economics & business, specifically cost
accounting, the break-even point (BEP) is the
point at which cost or expenses and revenue
are equal. There is no net loss or gain, and
one has "broken even". A profit or a loss has
not been made, although opportunity costs
have been paid, and capital has received the
risk-adjusted, expected return.Breakeven
Point is desired by all firms who wish to make
abnormal profit, over and above all costs. It is
shown graphically, at the point where the total
revenue and total cost curves meet.
 BREAK-EVEN ANALYSIS
 A breakeven analysis is used to determine
how much sales volume your business
needs to start making a profit.
 The breakeven analysis is especially useful

when you're developing a pricing strategy,

either as part of a marketing plan or a
business plan.
 Break-even analysis calculates what is

known as a margin of safety, the amount

that revenues exceed the break-even
point.
 BREAK EVEN
CALCULATER
Businesses must make a profit to survive .To
make a profit, income must be higher than
expenditure (or costs).
There are two types of costs:
Fixed Cost
The sum of all costs required to produce the first
unit of a product. This amount does not vary as
production increases or decreases, until new
capital expenditures are needed.
Variable costs
Increase by a step every time an extra product is
sold (eg; cost of ice cream cornets in ice cream
shop)
 Variable Unit Cost:

Costs that vary directly with the production

of one additional unit.
 Expected Unit Sales:

Number of units of the product projected

to be sold over a specific period of time.
 Unit Price:

The amount of money charged to the

customer for each unit of a product or
service.
 Total Variable Cost:
The product of expected unit sales and
variable unit cost.
(Expected Unit Sales * Variable Unit Cost )

 Total Cost:
The sum of the fixed cost and total
variable cost for any given level of
production.
(Fixed Cost + Total Variable Cost )
 Total Revenue:
The product of expected unit sales and
unit price.
(Expected Unit Sales * Unit Price )

 Profit (or Loss):

The monetary gain (or loss) resulting from
revenues after subtracting all associated
costs.
 (Total Revenue - Total Costs)
 BREAK EVEN POINT:
Number of units that must be sold in
order to produce a profit of zero (but will
recover all associated costs).

 Break Even Point (IN UNIT)=

Fixed Cost /S. Price- Variable Unit Cost

 Break Even Point (in Rs)=

Fixed Cost/ S. Price-Variable unit
Cost*Units
 Break-Even Analysis
TheAs Break-even
output is point
Total
The revenue
lower is
the
Costs/Revenue
TR TR TC The
occurs wheretotal
generated, total
Initially a by
determined the
firmthe
VC price,
revenue
costs
firm the
equals
will
willcharged
less
total
incur
incur fixed
price
costs – the firm, and
in
steep
thecosts,the
variable total
costs
thesesold
quantity do– –
this therefore
example
these vary would
revenue
not depend
again this
havedirectly
to sell Q1curve.
will on
to be
(assuming
determined
generate
with
output or sales.
by
sufficient
the
amount produced
expected forecast
accurate
revenue
sales
to cover
initially.
its
costs.
forecasts!) is
the sum of
FC+VC
FC

Q1 Output/Sales
 Break-Even Analysis If the firm
chose to set
price higher
Costs/Revenue than £2 (say
TR (p = £3) TR (p = £2) TC
VC £3) the TR
curve would
be steeper –
they would
not have to
sell as many
units to
break even

FC

Q2 Q1 Output/Sales
 Break-Even Analysis
Costs/Revenue TR (p = £1)
TR (p = £2) If the firm
TC VC chose to set
prices lower
(say £1) it
would need
to sell more
units before
covering its
costs

FC

Q1 Q3 Output/Sales
 Break-Even Analysis
TR (p = £2)
Costs/Revenue TC
Profit VC

Loss
FC

Q1 Output/Sales
 Break-Even Analysis Margin of
TR (p = £3) TR (p = £2)
TC A higher
safety showsprice
Costs/Revenue would lower
how far sales can
VC fall before
the breaklosses
Assume
made. If Q1 =
even
current
1000
point
and Q2sales
=
and
1800,
at Q2the
sales could
margin
fall by 800 ofunits
before awould
safety loss
would be made
widen

Margin of Safety
FC

Q3 Q1 Q2 Output/Sales
 USES OF BREAK EVEVN POINT
 Helpful in deciding the minimum
quantity of sales
 Helpful in the determination of tender

price
 Helpful in examining effects upon

organization’s profitability
 Helpful in deciding about the

substitution of new plants

 Helpful in sales price and quantity
 Helpful in determining marginal cost
 LIMITATIONS
 Break-even analysis is only a supply side (costs
only) analysis, as it tells you nothing about what
sales are actually likely to be for the product at
these various prices.
 It assumes that fixed costs (FC) are constant
 It assumes average variable costs are constant
per unit of output, at least in the range of likely
quantities of sales.
 It assumes that the quantity of goods produced
is equal to the quantity of goods sold (i.e., there
is no change in the quantity of goods held in
inventory at the beginning of the period and the
quantity of goods held in inventory at the end of
the period.
 In multi-product companies, it assumes that the
relative proportions of each product sold and
produced are constant.
 CONCLUSION
 A break even analysis helps businesses
determine when they will have enough
money to cover their expenses. The
advantages of this analysis is to help
the business remain successful and not
go into debt. The disadvantages of this
analysis is that sometimes companies
do not break even and they must
determine how they can do so.