Break even analysis

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Break even analysis

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

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