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BREAK EVEN ANALYSES

Break Even is:

• the sales point at which the Company neither


makes profit nor suffers loss, or

• sales level where fixed cost are fully absorbed by,


or

• the level where contribution margin equals the


fixed cost.
BREAK EVEN ANALYSES

Breakeven analysis provides data for

• profit planning

• policy formulating and

• decision making
BREAK-EVEN ANALYSIS

Break-even analysis may be


based on:
•historical data,
• past operations, or
•future sales and costs,
depending on
management’s need and
desire.
BREAK EVEN ANALYSES

• The break even analyses technique is used in various


business decision making areas, as this help in knowing
the minimum desired level to be achieved to avoid loss
situation.

• The Breakeven analysis is mostly used at the time of


investing in new project and introducing new products.

• The organizer of this workshop must have seen Break


even for this workshop.
USE OF BREAK EVEN
ANALYSES

• In case a company installed a new plant where huge


fixed cost is incurring. Management would be
interested in knowing the minimum number of units to
be produced and sold to recover its monthly fixed cost
i.e. called its breakeven point.

• This will be the point where company will not incur


any loss nor make any profit.
USE OF BREAK EVEN ANALYSES

 Hospital or Hotel management would like to know sales


point in terms of number of beds/ rooms, to recover fixed
cost to reach at a breakeven point.

The school owner would be interested in knowing


minimum number of students to be admitted to reach at
breakeven

 New branch of bank would need to know minimum


deposits from customer
USE OF BREAK EVEN ANALYSES

 On introduction of new products certain huge sales


promotional expenses are planned in order to achieve
planned sales.

 The management while deciding about approving


expenditures would be interested to see cost / benefit
analyses or minimum expected sales (break even) to be
achieved to recover these expenses (disregarding the
very ambitious sales budgets submitted by the sales and
marketing team)
FORMULA TO COMPUTE BREAK EVEN
• Break-even sales in units
Fixed expenses/CM per unit

• Breakeven Sales in rupees


Fixed Expenses/CM ratio

• Profit
Margin of safety x CM ratio

• Margin of safety
Sales – BE

• Contribution margin
Sales – variable expenses

• Conventional income statement be analyzed to determine its fixed and


variable cost.
EXAMPLE 1
a) Participants are advised to work out
BREAK EVEN on the basis of data
given below:
• Fixed Expenses ……Rs 600
• Sales price…………Rs 1.75 per unit
• Cost – variable…… Rs 0.95 per unit

b) Determine no. of units to be sold to earn a

profit of Rs. 720


SOLUTION TO EXAMPLE 1
A)
• Contribution Margin = 1.75 - 0.95 …… Rs. 0.80 per
unit

• CM ratio = 0.8 / 1.75 x 100 ……… 45.7%

• Breakeven sales in units = 600 / 0.80 750 units

• Breakeven sales in rupees =600 / 0.457


(750 x 1.75 = 1313) = ………. Rs. 1,313

B)
No. of units to be sold if Management want to earn Rs. 720

• BE + Profit / CM = (600 + 720) / 0.80 = 1650 units


EXAMPLE 1

a)
• A company sells T-Shirt @ Rs 8/-per unit.
Management expects to sell between 12000 units to
20000 units.
• The business will incur fixed expenses of Rs
10,000/- and variable expenses of 50% of sales.

b)
• If the company desire to earn profit of Rs 14,000 in
above example. What should be the sale level?
SOLUTION TO EXAMPLE 2
a) Break Even Sales (Units) = 10,000 / 4 = 2500 Units
Break Even Sales (Rupees) = 10,000 / 0.50 = Rs. 20,000

b) Sales = (Fixed Exp. + Profit desired)/CM ratio


= (10000 + 14000)/0.50
= Rs.48,000/-

Working to check the above Sales


Sales 48,000
Variable Cost 50% 24,000
CM 24,000
Fixed Expenses 10,000
Desired Profit 14,000
EXAMPLE 3
Sitara Company’s most recent income statement is shown below:
Total Per Unit
Sales (20,000 units) ………. Rs.300,000 Rs. 15.00
Less : Variable expenses …… 180,000 9.00
Contribution margin ..……… 120,000 Rs. 6.00
Less : Fixed expenses ……… 70,000
Net income ……………… Rs. 50,000
Required
Prepare new income statement under each of the following condition:
Other information:
1. The selling price increases by Rs. 1.50 per unit,
2. Fixed expenses increase by Rs. 20,000.
3. the sales volume decreases by 5%.
4. The selling price increases by 12%
5. Variable expenses increase by 5%
6. The sales volume decreases by 10%,and fixed expenses reduced by 25%
SOLUTION TO EXAMPLE 3

i) Sales (19000 x 16.50) Rs. 313,500


variable expenses 171,000
142,000
Fixed Expenses 90,000
Net Income 52,500
=======
ii) Sales (18000 x 16.80) 302,400
variable expenses @9.45 170,100
132,300
Fixed Expenses 52,500
Net Income 79,800
=========
CASE STUDY
FOCUS ON CURRENT STUDY

Airlines have long recognized that once a flight is scheduled,


the variable cost of filling a seat with a passenger is very small.

The costs of the cockpit flight crew, fuel, gate rentals,
maintenance, aircraft depreciation, and so on, are all basically
fixed with respect to the number of passengers who actually
take a particular flight.
The cost of the cabin flight crew is a step-variable cost--the
number of flight attendants assigned to a flight will vary with
the number of passengers on the flight.
The only true variable costs are the costs of meals and an
almost inconsequential increase in fuel consumption. Therefore,
adding one passenger to a flight brings in additional revenue but
has very little effect on total cost.
CASE STUDY
FOCUS ON CURRENT STUDY

 Consequently, airlines have been stuffing more and more


seats into their aircraft. Boeing 747s were configured
originally with 9 seats across a row, but now they
frequently have 10.
 One major airline has raised the number of seats in its
fleet of DC-10 planes from 232 to nearly 300.(Source:
Michael J. McCarthy, “Airline Squeeze Play: More Seats,
Less Legroom,” The Wall Street Journal, April 18,
1994,pp. B1 and B6.)
Required:
 Advise what should the operating manager know for each
scheduled flight?
 List down expected variable and fixed expenses of a
flight.
PRACTICAL SITUATION
IMPACT OF LABOR LAWS ON COST
BEHAVIOR

In the early 1990s, General Motors Corp. laid off tens of thousands of its
hourly workers who would nevertheless continue to receive full pay under
union contracts. GM entered into an agreement with one of its suppliers,
Android Industries, Inc., to use laid-off GM workers. GM agreed to pay
the wages of the workers who would be supervised by Android Industries.
In return, Android subtracted the wages from the bills it submitted to GM
under their current contract. This reduction in contract price is pure profit
to GM, since GM would have had to pay the laid-off workers in any case.

(Source: “GM Agrees to Allow a Parts Supplier to Use Some of Its Idled Employees,” The Wall Street
Journal, November 30, 1992.)
CONCEPT REVIEW
EXERCISE

Fill in the blank

3. ____________________ expenses directly vary with the


volume of production.

5. ___________________ indicates the sales point at which


the company neither makes profit nor suffers loss.

7. A _____________ cost does not change in total despite


change in volume.

9. Contribution margin is equal to Sales less ____________


expenses.