SUBMITTED TO:-
PROF . S.L. KAUSHAL
( MANAGERIAL ECONOMICS )
HIMACHAL PRADESH UNIVERSITY BUSINESS
SCHOOL , SUMMERHILL
171005 HPUBS
Presentation on Break Even Analysis
Presented by :-
Roll No. Name Topic
5033 Heena Meaning of Break Even Point , objectives ,
concept of Break Even Analysis.
5081 Shiwani Determination of B.E.P, Formulas &
Examples.
5103 Vibhu B.E Charts (Analysis)
Assumptions.
5115 Ankush Kumar Uses of B.E.P
Limitations
5127 Shivam Verma Case study on B.E.P,conclusion.
WHAT IS MEANT BY BREAK-EVEN POINT?
The break-even point (BEP) may be defined as that level of sales at which total revenues
equals to the total costs and the net income is equal to zero.
This is also known as no profit no loss point.
The most important method of determining the cost-volume - profit relationship is that of
break even analysis, also known as C-V-P analysis
Total cost = Total revenue = B.E.P.
Heena-5033
OBJECTIVES
The main objective of the break- even analysis is not simply to spot the BEP , but to develop an
understanding of the relationships of cost, price and volume within a company’s practical range
of operations .
The preparation of break even chart after analysis is an excellent instrument panel for your
guidance in controlling your business .
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.
CONCEPTS OF BREAK-EVEN POINT
Unit Price: The amount of money charged to the customer for each unit of a product or
service.
Total Cost: The sum of the fixed cost and total variable cost for any given level of
production.
(Fixed Cost + Total Variable Cost )
Total Variable Cost: The product of expected unit sales and variable unit cost.
(Expected Unit Sales * Variable Unit Cost )
Total Revenue: The product of expected unit sales and unit price.
Profit/ loss: The monetary gain or loss resulting from revenues after subtracting all associated
costs.
(Total Revenue - Total Costs)
Determination of BEP
A business is said to break-even when its income equals its expenditure.
When production exceeds the “Break-even point”, the business makes a profit and when it
is below the “Break-even point”, the business makes loss.
It may be determined in the terms of :
Physical units.
Sales value .
Shiwani - 5018
(i) Break-Even-Point in Terms of Physical
Units:
Break even volume is the number of units of a product which must be sold to earn enough
revenue just to cover all expenses.
The break-even-point (BEP) is reached when sufficient number of units have been sold
so that the total contribution margin of the units sold is equal to the fixed costs.
B.E.P = Fixed costs/Selling Price – Variable cost per unit.
(ii) Break-Even-Point in Terms of Sales
Value:
Multi product firms are not in a position to measure the BEP in terms of any common unit
of product. In these firms it is convenient to determine their BEP in terms of total rupee
sales.
In this case BEP would be the point where the contribution margin (Sales value-Variable
costs) would be equal to fixed costs contribution margin is expressed as a ratio to sales.
B.E.P = Fixed costs/Contribution ratio
where, Contribution ratio = Sales value – Variable costs/Sales value
Example
Franco Co-operation makes iron benches and wants to determine the break-even point.
The total fixed cost for his business is $60,000 and the variable cost is $40 per bench. He
sells the bench for $100 per unit.
Solution:
A Contribution per Unit is calculated by using the formula given below:
Contribution per Unit = Selling Price – Variable Costs
Contribution per unit = $100 – $40
Contribution per unit = $60
Now let’s calculate the number of benches Franco needs to achieve Break-Even;
Break-Even Point is calculated by using the formula given below:
Break-Even = Fixed Costs / Contribution per Unit.
Break-Even = $60,000 / $60
Break-Even = 1000 benches
When Franco produces 1500 benches the total cost is $120,000 and the total revenue is $150,000.
The break-even point is where total costs equal total revenue and in this case, it is at $100 * $1000 = $100000
At a level below the Break-Even, losses are incurred, this is because total costs are greater than total revenue. If 500 units are produced a loss of
$30,000 are incurred
The graph highlights the total cost and profit.
The point where these lines intersect is known
as the Break-Even Point.
As we go below the graph, losses are made,
and as we move on the upper side the profits increase.
Profits increase as output rises.
At an output of 1500 profit of $30,000 is made.
Break Even Chart:-
The break-even chart, also known as the Cost volume profit
graph, is a graphical representation of the sales units and the
dollar sales required for the break-even. On the vertical axis, the
chart plots the revenue, variable cost, and the fixed costs of the
company, and on the horizontal axis, the volume is being plotted. Vibhu - 5103
ASSUMPTIONS:-
1. All costs are divided into fixed and variable costs.
2. Fixed costs will remain constant and will not change according to the level of production.
3. Variable costs will change in direct proportion according to the level of production. In other words, the prices of variable
cost factors will not charge in direct proportion to the level of production. They are wage rates, cost per unit of material and
the like.
4. Selling price remain constant even though there exists competition or any change in the volume of production.
5. The number of units of production is equal to sales. It means that there is no opening or closing stock.
6. The operating efficiency of the company remains the same.
7. There is only one product or product mix in the case of many products will remain unchanged.
Diagram explanation:-
(1) It is customary to use the horizontal axis for units of output and vertical axis for monetary values like sales, revenue and total costs.
(2) Sales revenue line makes an angle of 45o and start from (0,0).
(3) As fixed costs remain the same at all output levels so fixed cost line is drawn across the chart as a straight line parallel to the horizontal axis.
(4) The variable cost lines commences on the vertical axis from the same point where fixed cost line intersects the vertical axis. This is to show total cost on the chart.
(5) On the chart, break even point represents the point at which total cost and total revenue lines cross each other.
(6) The break-even point so determined tells the reader that the break-even point in terms of units of output on the horizontal axis and in terms of sales revenue and total
costs on the vertical axis.
(7) Shaded area below the break-even point indicates losses, whereas shaded area above the break-even point indicates profits.
(8) Profit and loss on break even chart may be determined by looking at the vertical distance between the sales revenue and total cost line.
(9) The difference between the prevailing sales and the break even sales represents margin of safety both in terms of sales revenue and output level.
(10) If break even point appears well over the right side of the chart then it would imply too high total fixed costs or low contribution. This will result in lower margin of
safety.
(11) If the break even point over to the left side of the chart coupled with a large angle of incidence then it would imply either lower total fixed costs or high contribution.
Managerial Uses & Limitations Of Break
Even Analysis
Ankush Kumar - 5115
Managerial Uses of Break-Even Analysis :
1. Safety Margin:
The break-even chart helps the management to know at a glance the profits generated at the
various levels of sales. The safety margin refers to the extent to which the firm can afford a
decline before it starts incurring losses.
The formula to determine the sales safety margin is:
Safety Margin =
Example : Assume that our sales are 8,000 units and Break-even point is
6,000 units.
Safety Margin =
= 25 %
This means that, we can afford to lose sales up to 25 % of the present level before incurring a loss.
2. Volume Needed to Attain Target Profit :
The break-even analysis can be utilized for the purpose of calculating the volume of sales
necessary to achieve a target profit.
Target Sales Volume =
Example: Let desired profit is Rs. 6,000, fixed cost is Rs. 6,000 and contribution margin is Rs. 5 per unit then the target sales
volume would be calculated as follows:
Target sales volume =
= 2400 units
3. Change in Price:
The management is often faced with a problem of whether to reduce prices or not. Before
taking a decision on this question, the management will have to consider a profit. A
reduction in price leads to a reduction in the contribution margin.
This means that the volume of sales will have to be increased even to maintain the previous
level of profit. The higher the reduction in the contribution margin, the higher is the
increase in sales needed to ensure the previous profit.
New Sales Volume =
4. Make or Buy Decision:
Firms often have the option of making certain components or for purchasing them from outside the concern. Break-even analysis can
enable the firm to decide whether to make or buy.
Example:
A manufacturer of car buys a certain components at Rs. 20 each. In case he makes it himself, his fixed and variable cost would be Rs.
24,000 and Rs.8 per component respectively.
Break even point =
=
=
= 2,000 units
From this, we can infer that the manufacturer can produce the parts himself if he needs more than 2,000 units per year.
5. Change in Production Capacity:
Break Even analysis helps the firm in taking the decision whether to increase or reduce
its existing production capacity. In this respect, several factors are taken into account,
such as, possibility of change in profit; possibility of change in quantity for sale or sales
price, etc. If any change has positive impact on contribution of the firm the change will
accepted or vice versa
6. Target Capacity :
It is with the help of break even analysis that a firm can determine target capacity to
take advantage of minimum cost of production. The capacity at which firms earns
maximum contribution will be the target capacity of the firm.
General Uses Of Break Even Analysis
(i) It helps in the determination of selling price which will give the desired profits.
(ii) It helps in the fixation of sales volume to cover a given return on capital employed.
(iii) It helps in forecasting costs and profit as a result of change in volume.
(iv) It gives suggestions for shift in sales mix.
(v) It helps in making inter-firm comparison of profitability.
(vi) It helps in determination of costs and revenue at various levels of output.
Limitations of Break Even Analysis :
(1)Ignores changes in input prices :
Prices of inputs like raw materials wages etc are liable to change constantly. Since break even analysis is based on past
data it becomes necessary to adjust this data in the context of changes in the prices of inputs however, it is not so done.
As a result , the use of break even analysis becomes limited.
(2)Ignores changes in product prices :
Break even chart is prepared on the bases of the current product prices. But, in real life, product prices undergo change
regularly. However, in break even chart changes in product prices are not included because it becomes difficult to
make the correct estimate of the quantity of sale at different prices. As a result, break even analysis is rendered
unrealistic.
(3) Unsuitable for Multi-products:
Break-even analysis is suitable for a few products. Simultaneous analysis of several products, several plants and
several departments is very complex. Thus, this analysis is not suitable for multi-products.
(4)Unsuitable for Long- term Analysis :
Break even analysis is not suitable for long term analysis. It has relevance for short term analysis only.
(5)Profit is not a Function of Output only:
The assumption that profit is a function of output only is unrealistic. In Real life, profit is a function of many
other factors like technological changes, efficient management, scale of production etc.
Case Study:-
1. RAJIV GANDHI SETU
A classic example of break even Failure.
What went wrong ?
Increase in the initial project cost from Rs 1300
cr. to Rs 1650 cr.
Project 65,000 vehicles to use the bridge, but
only 40,000 actually taking it
High toll tax
Shivam Verma-5127
The result :
Fell short of the daily break even collection of 20 lakhs by nearly Rs 4 lakhs.
Strategies applied :
Convince BEST to change route of its 300 odd buses, and use the bridge.
Collection of Rs 3000 – Rs 5000 per bus per month.
Come out with monthly and daily passes.
Recently, they have planned to increase the toll tax.
2. JUMBO KING
(VADA PAV)
A classic example of break even Success and sustenance.
Early days:
First outlet in 1990 and spread to nearly 45 outlets in the city.
Chose the method of Franchisee model like McDonalds with
networking and stringent quality control.
15% of revenue is generated in form of fees from the franchisee
owners.
COST INCURRED
Franchisee purchase cost = 18lacs (One time)
Fixed cost
Rent and electricity cost = 50000 pm
Salaries = 30000 pm (Cook and attendant)
Machinery = 400000 (One time cost )
Variable cost
Food and beverages = 500000 pm
Other items = 10000 pm (Including glass / tissue papers etc)
Selling price
Ranging from 8-20 Rs
CURRENT SITUATION…
Average demand:
5000 Vada pavs per day
Average revenue:
60,000 per day
Projected break even period:
4 months
STRATEGIES APPLIED….
Launch the outlets near railway stations.
Total stores: 45 stores in 7 years with a profit revenue of Rs 12 cr in 2007-8 and an early
breakeven falling in the same year with no reported losses thereafter.
Turnover of Rs 40 lakh in its first full year of operation. (first ever store)
The company has a turnover of Rs 8 cr (under $2 million) as on date!
All the money from the first outlet is used to buy the second outlet.
CONCLUSION:-
A company should determine its break even point before selling
its products.
In order to know the price your product, you first have to know
how to calculate breakeven point.
Break-even analysis is a supply side analysis; that only analyzes
the costs of the sales.
It does not analyze how demand may be affected at different
price levels.
REFERENCES:-
Managerial Economics by Craig H. Peterson, [Link] Lewis and Sudhir K Jain.
Managerial Economics by Kalyani Publishers.
PICTURE REFERENCE :
Google , Pinterest and stocksnap.
MANAGERIAL ECONOMICS BY R.L. VARSHNEY AND K.L. MAHESHWARI
M. ADHIKARI - MANAGERIAL ECONOMICS , NCERT , INTERNET
Thank
You!
