BREAK EVEN ANALYSIS

Prepared by:
Dr. B. K. Mawandiya
 Break Even Analysis (BEA)
 BEA implies that at some point in the operation total revenue equal to total cost.

 BEA is concerned with finding the point at which revenues and costs agree exactly.

 Break even point means the level of output or sales at which no profit or no loss.

 A business is said to be break even when expenditure is equal to income .

 Break even point(BEP) means no profit or no loss .

 Production (sale) increase above BEP means profit. If production is below the BEP
then it means loss.
Importance and Scope of Break Even Analysis
a) What volume of sales will be necessary to cover a reasonable return on
capital employed
b) Computing costs and revenues for all possible volumes of output to fix
budgeted sales
c) To find the price of desired article to give the desired profit.
d) Quantity needed (to be sold/produced) to have desired profit.
e) Whether to accept an order or not.
 Mathematical Model
Break even point can be calculated as:
Q BEP =F/(S-V)
Q BEP =Quantity at BEP;
F =Fixed cost;
S= Selling cost per unit;
V=Variable cost per unit;
P =Profit;
If Q BEP be the quantity produced
Total cost= F + Q BEP * V;
Total revenue(sale) = Q BEP *S;
F+ Q BEP *V = Q BEP *S;
Q BEP =F/(S-V)
 Graphical Method (Break Even Chart)
A break even chart is used to determine break even point and amount of profit or
loss under varying conditions of output and cost.
Sales or expenditure in rupees is represented on vertical axis while output (either in
quality or in percentage capacity) is represented on horizontal axis
Interpretations and analysis of Break Even Chart

1. The break even point marking no profit no loss situation for a given volume of
production.
2. The cross-hatched area between the total cost line and revenue line on the
left-hand side of the break even marks loss to the concern, whereas the area
between the same lines on the right hand side of the break even point
represents profit to the concern.
3. The profit appears only when more than a minimum volume of output is
reached . Profit increased at a faster rate than the total cost.
4. Effect of an increase in fixed cost: The fixed cost may change due to increase
in executive salaries, taxes, insurance, building rent or purchase of new
machine etc. Due to increase in fixed costs the total cost increase, and thus
shift the BEP towards the right hand side if there is no change in the sales
price.
Effect of an increase in variable cost
An increase in variable cost, leads to increase in total cost would shift the BEP right side.
This involves a decrease in profit for the same units of output.
For maintaining the same level of product either sales price is to be increased or sales volume is to be
increased.
Effect of an increase in Sales prices
If the price of an article rises, a new sales revenue will be drawn with a greater slop. This shifts
the BEP towards the left hand side thus increases the company’s profits for the same volume of
output.
Effect of a decrease in Sales prices, Variable cost and fixed cost can
be visualized in the same manner as in the case of increase in sales
price variable cost, fixed cost by drawing separate ‘Break Even
charts’ but the effect will be just reverse.
Application of Break Even Analysis
1. Selection of machines
For a production less than ‘Q’ manual lath is profitable, and for production more than ‘Q’
automatic lath is profitable. For production ‘Q’ both machine are same this point is called “Break
even Point”, it is also known as CUT EVEN POINT.
Make or buy Decision
If the cost to purchased with the quantity purchased then BEP can be plotted as below
Q=Fixed cost/(purchase price – variable cost)
Purchase cost is cheaper when the quantity and it is costlier when the quantity is more than Q
Margin of safety
Margin of safety can be presented on the break even chart as the distance between BEP
and the output being produced
It is the difference between output at full capacity and the output at BEP
It can be also expressed as percentage of output at full capacity.
MARGINE OF SAFETY =(QM-QBEP)/QM*100
=(output at full capacity –output at BEP)/ output at full capacity*100
= (sales at full capacity- sales at BEP)/ sales at full capacity*100

Angle of Incidence
It is the angle at which income line cuts the total cost line.
If the angle of incidence is larger it is an indication that profits made at a high rate.
If angle indicate less then it made less profit.
A large angle of incidence with a high margin of safety mark the extremely favorable
business position.
 Contribution
It is the difference between sales and variable cost. It is also called as marginal profit or gross
profit .
The marginal profit provides the contribution towards fixed cost and profit.
 Limitation of Break Even Chart
1) The BEP is difficult to determine in many instances because of the difficulty in properly
classifying costs as either fixed or variable and because market conditions may not remain
constant over the range of projected capacity.
2) The break even chart is a tool for short run analysis. It cannot be used for 8 or 10 years of
projections, because of the difficulty of indicating variables in each of the costs line the
chart
3) The total cost line representing the variable cost added to fixed cost need not be straight
line, in actual fact cost do not usually vary in direct proportion.
4) The straight line which represents a static picture whereas business operation are far
from static.
5) The straight line which represents sales revenue may also misrepresents the true facts.
6) Analysis of break even chart presents additional difficulties (eg. In product mix). When a
company produces a variety of products.
THANK YOU