BREAK-EVEN ANALYSIS

BEA
(OR COST-VOLUME-PROFIT)
 01/11/22
 - The Wall Street Journal, Oct. 21, 2013.
 Apple’s Long Road to Break Even:

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It has been quite a year for Apple Inc. Shareholders.
After Monday’s 3% rally ahead of Tuesday’s expected iPad** event, the stock is closer
to breaking even for 2013, a mark that seemed out of reach just a few months ago.
** The iPad Mini is the world’s best-selling tablet computer, and is estimated to
account for nearly two of every three iPads sold

 TOI Sep. 20 - Uninor breaks even in 5 out of 6 circles

 NEW DELHI: Uninor, the Indian unit of Sweden's Telenor, on Thursday said it has
achieved break-even in two more telecom zones it operates in. These are Uttar Pradesh
(west) and Bihar zones where the company is now EBITDA (earnings before interest, tax,
depreciation and amortization) breakeven, chief executive Yogesh Malik said. 

 2
MINT SEP. 20, 2013
Daimler banks on exports to achieve break even:

01/11/22

Daimler India Commercial Vehicles Pvt. Ltd is banking on exports to help it
achieve operational break even within the next two years, managing director

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and chief executive Marc Llistosella said on Thursday. The German truck
maker, which invested Rs.4,400 crore in putting up its plant in Oragadam,
near Chennai, is working towards making India an export hub
The Financial Express, Oct 21, 2013
Air Asia India hopes to break even within a year of
operations:
Air Asia India, which will begin domestic services later this year,
hopes to break even within a year of commencing operations,
its group chief executive officer Tony Fernandes said . We
hope to have a stable cost structure after seven-eight planes
and then break even with 57-58% occupancy,” said
Fernandes 3
WHAT IS BEA ?
 Before incurring exp., mangers want to know whether they

01/11/22
would get a return on Investment? [for eg., to assess the
financial feasibilty of marketing investments]

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 BEA ( or finding the BE point) is one way to find that!!!

 BEP calculates the no. of (additional

units) the firm needs to sell to cover the
cost of the programme….


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THE BE FORMULA

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 A brief Recap:
1. Cost Function = FC + VC

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2. VC = c * q , (c = variable cost per unit)

3. Revenue = p * q , ( p =price per unit) &

here we State that

4. at BE , TR = TC 5
 01/11/22
 So, BE quantity (BEQ) is the unit qty. which yields
‘zero profits’ to the firm.

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 i.e., at BE, TR = TC….
 TR [ ie.,(p*q)] = TC [ ie.,(c*q + FC)]

 [Here, q is common to both sides of this equation]

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 01/11/22
 From TR = TC,
 We’ve #p * q = c * q + FC

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 ie., p*q – c*q = FC
 Or, (p-c)q = FC
 Or q = FC / (p-c)
 ie., the BEQ = FC / [( price/unit)-( cost/unit)]

 # Is p the retail price always???

 P/unit- Cost/Unit = Contribution margin

BEQ = FC / contribution margin

per unit 7
TO SUM UP..

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 “ to calculate a BEP / to understand how many units of a
product we need to sell to cover our costs, we need to

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know the fixed costs of the programme and the amount
of profit we make from each unit we sell”

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GRAPHICAL REPRESENTATION..

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WHAT AFTER CALCULATING THEBEQ?

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 Determine how the numbers influence the decision that
has to be made.

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 Assess the feasibility of selling the BEQ as a result of
the planned investment

 Risk assessment to calcualte the probabilty of success for

selling the BEQ..

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 01/11/22
 Determine the period the firm will take to achieve
break even…by relating BEQ to time..

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 This is sometimes called the “ Payback Period”- the
period of time the firm needs to pay back its investment..

 The longer the payback period the higher is the risk

element for the firm..WHY???

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EXAMPLE 1

01/11/22
 Firm Q-matrix sells a product at Rs. 35 per unit. The VC
for the product is Rs.30 per unit and its FC is Rs. 70000.

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What is the qty.of product, the firm must sell in order to
Break-Even?

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 Solution:

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 Cost = FC + VC
= 70000 + 30q

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Revenue = p *q
= 35q

At BEP, R = C, ……….OR
35 q = 70000 + 30 q

35q -30 q = 70000

5 q = 70000
or q = 70000 / 5 = 14000

Hence the firm must sell 14000 units to break even…… 13

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 Alternatively,
 BEQ = FC / per unit margin contribution

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 = 70000 / (35-30)
= 70000 / 5
= 14000 units

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EXAMPLE 2

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 Okhla Printing Co. gets a contract to print economics
text books. It is estimated that it would incur a VC cost

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of Rs.33/- per book and a FC of Rs. 4,50,000. The no. of
books that need to be sold to Break-even is 37500 units.
Find the selling Price per unit of book?

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 01/11/22
 Solution :
 Cost = FC + VC

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 =450000 + 33q = 450000 + 33(37500)
 Revenue = p* q

 = p* 37500

 At BE, R= C,………………….PTO

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 01/11/22
 P*37500 = 450000 +33(37500}

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 P * 37500=450000 + 33( 37500)
 37500 P= 450000 +1237500

 37500 P = 1687500

 SO P= 1687500/37500 = 45….
 Therefore, the selling price at BE is Rs. 45/-

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EG.3.

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 Big Cinemas in Meerut sells a ticket for the 9.00 am
show @Rs. 45/-. The cost function for this product is

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C(q)= 33q + 4800.
 1.Find the no. of tickets Big Cinemas need to sell for
this show to BE…
 2. If it is known that the seating capacity of the cinema
hall is 100 and the show for which ticket price is Rs. 45
is run only for one day in a week, estimate the
Minimum Payback period for the show, assuming that
the cost function remains the same…

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SOLUTION:

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R = p * q = 45q
C= 33q +4800

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 At BE , R=C, &
 45q = 33q +4800 , or

 12 q =4800

 q = 400.

 Big cinemas should sell 400 tickets to Break even

 What’s the PAYBACK Period?

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01/11/22 Rajkishan Nair IILM
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