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ANALYSIS
INTRODUCTION
• Break-even analysis is of vital importance in
determining the practical application of cost functions.
It is a function of three factors, i.e. sales volume, cost
and profit. It aims at classifying the dynamic
relationship existing between total cost and sale volume
of a company.
Q1 Q3 Output/Sales
Break-Even
Analysis
TR (p = Rs.2)
Costs/Revenue TC
Profit VC
Loss
FC
Q1 Output/Sales
DETERMINATION OF BEP
• The formula for calculating the break-even point is
ВЕР = Total Fixed Cost/Contribution Margin Per Unit
• Example:
• Suppose the fixed cost of a factory in Rs. 10,000, the selling price
is Rs. 4 and the average variable cost is Rs. 2, so the break-even
point would be
• ВЕР = 10,000/(4-2) = 5,000 units.
• It means if the company makes the sales of 5,000 units, it
would make neither loss nor profit. This can be seen in the
analysis.
• The firm achieves its ВЕР when its sales are Rs. 600
• Total Revenue = Rs.600
• Total Cost = Rs.600
• Net Profit/loss = Nil
USES OF BEA
(i) It helps in the determination of selling price which will give
the desired profits.
would
(ii) Target Profit:
• By way of illustration, Suppose the firm fixes the profit as Rs.
100, then the volume of output and sales should be 250 units.
Only at this level, it gets a profit of Rs. 100. By using the
formula, the same result will be obtained.
• Target Sales Volume = Fixed Cost + Target Profit / Contribution
Margin per unit = 150 + 100 / 4-2 = 125 units (125*2 VC) (150
FC) TC = 400 TR = 125*4 = 500
(iii) Change in Price:
• The formula for determining the new volume of sales to maintain
the same profit, given a reduction in price, will be as follows:
• New Sales Volume = Total Fixed Cost + Total Profit/ New
Selling price – Average Variable Cost
• For example, suppose a firm has a fixed cost of Rs. 8,000 and the
profit target is Rs.20,000. If the sales price is Rs.8 and the average
variable cost is Rs. 4, then the total volume of sales should be
7,000 units on the basis of the formula given under target price.
• Suppose the firm decides to reduce the selling price from Rs.8 to
Rs. 7, then the new sales volume should be on the basis of the
above formula:
• New Sales Volume = 8,000 + 20,000/7-4 = 9,333
• From this, we can infer that by reducing the price from Rs. 8 to
Rs. 7, the firm has to increase the sales from Rs. 7,000 to Rs
9,333 if it wants to maintain the target profit of Rs. 20,000. In the
same way, the sales executive can calculate the new volume of
sales if it increases the price.
(iv) Change in Costs: