Break even analysis
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Break even analysis

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Break even analysis Presentation Transcript

  • 1. "If you just record what the teachers say, you dont learn anything"
  • 2. Break Even Analysis(BEA)
    • It is necessary for a firm to plan its profit. So it should understand the relationship Of Cost, Price, and Profit. The most important method of determining is Break-Even Analysis.
    • Break Even Point = Total Revenue – Total Cost
    i.e No – Profit -- No loss Point
  • 3. Assumptions of Break-Even Analysis
    • Fixed costs are constant,only variable costs change.
    • The Firm produces only one product.
    • Selling price remains constant, does not change with volume of scale.
    • Constant-technology
    • Costs and revenue change with changes in sales volume
  • 4. Break-Even Analysis Formula:- BEP= Fixed costs Selling Price - Variable Costs per unit
    • Example:
    • If Fixed costs= Rs10,000
    • Selling Price =Rs 5P.U
    • Variable Costs =Rs 3 P.U
    Rs. 10,000 BEP= ______________ 5 -- 3 BEP = 5000 units
  • 5. Diagram of Break Even Point Output Revenue and Costs TR TC TFC Break Even Point Profits Loss 0 Q X Y
  • 6. Diagram of Break Even Point Output Revenue and Costs TR TC TFC Break Even Point Profits Loss 0 Q X Y TVC
  • 7. Uses of Break – Even Analysis
    • What happens to overall profitability when a new product is introduced?
    • What level of sales is needed to cover all costs and earn, say Rs 1,00,000 profit or a 12% rate of return?
    • What happens to revenues and costs if the price of one of a company’s product is hanged?
    • What happens to overall profitability if a company purchases new capital equipment or incurs higher or lower fixed or variable costs?
  • 8.
    • Between two alternative investments which one offers the greater margin of profit (safety)?
    • What are the revenue and cost implication of changing the process of production?
    • Should one make buy or lease capital equipments?
    Uses of Break – Even Analysis
  • 9. Advantages of break even analysis in Managerial decision making
    • It helps in determining the optimum level of output below which it would not be profitable for a firm to produce
    • It helps in determining the target capacity for a firm to get the benefit of minimum unit cost of production.
    • The firm can determine minimum cost for a given level of output.
  • 10. Advantages of break even analysis in Managerial decision making
    • It helps the firm in deciding which products are to be produced and which are to be brought by the firm.
    • Plant expansion and contraction decisions are often based on the break even analysis of the perceived situation.
    • Impact of changes in prices and costs on profit of the firm can also be analyzed with the help of break even technique.
  • 11. Advantages of break even analysis in Managerial decision making
    • Sometimes a management has to take decisions regarding dropping or adding a product to the product line. The break even analysis comes very handy in such situation.
    • It evaluates the percentage financial yield from a project and thereby helps in the choice between various alternatives projects
  • 12. Advantages of break even analysis in Managerial decision making
    • The break even analysis can be used in finding the selling price which would prove most profitable for the firm
    • By finding out the break even point the break even analysis helps in establishing point where from the firm can start payment of dividend to its shareholders