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- 1. SUFIYAN CHAITANYA ESHAN NUPUR
- 2. Breakeven analysis examines the short run relationship between changes in volume and changes in total sales revenue, expenses and net profit Also known as C-V-P analysis (Cost Volume Profit Analysis)
- 3. Break-Even Analysis is used to ◦ predict future profits/losses ◦ predict results e.g. produce Product A or Product B Break-Even Point is when Sales Revenue equals Total Costs at this point no profit or loss is incurred the firm merely covers its total costs Break-Even Point can be shown in graph form or by use of formulae Break-Even Analysis
- 4. There are two basic types of costs a company incurs. • Variable Costs • Fixed Costs Variable costs are costs that change with changes in production levels or sales. Examples include: Costs of materials used in the production of the goods. Fixed costs remain roughly the same regardless of sales/output levels. Examples include: Rent, Insurance and Wages Break-Even Analysis
- 5. Break-Even Analysis TOTAL COSTS ◦ Total Costs is simply Fixed Costs and Variable Costs added together. TC = FC + VC ◦ As Total Costs include some of the Variable Costs then Total Costs will also change with any changes in output/sales. ◦ If output/sales rise then so will Total Costs. ◦ If output/sales fall then so will Total Costs.
- 6. The Break-even point occurs when Total Costs equals Revenue (Sales Income) Revenues (Sales Income) = Total Costs At this point the business is not making a Profit nor incurring a Loss – it is merely covering its Total Costs Let us have a look at a simple example. Trading Company opens a flower shop.
- 7. Fixed Costs: • Rent: Rs400 • Helper (Wages): Rs200 Variable Costs: • Flowers: Rs0.50 per bunch Selling Price: • Flowers: Rs2 per bunch So we know that: Total Fixed Costs = Rs600 Variable Cost per Unit = Rs0.50 Selling Price per Unit = Rs2.00
- 8. We must firstly calculate how much income from each bunch of flowers can go towards covering the Fixed Costs. This is called the Unit Contribution. Selling Price – Variable Costs = Unit Contribution Rs2.00 - Rs0.50 = Rs1.50 For every bunch of flowers sold Rs1.50 can go towards covering Fixed Costs Break-Even Analysis SP = Rs2.00 VC = Rs0.50 FC = Rs600
- 9. Now to calculate how many units must be sold to cover Total Costs (FC + VC) This is called the Break Even Point Break Even Point = Fixed Costs Unit Contribution Rs600 Rs1.50 = 400 Units Therefore 400 bunches of flowers must be sold to Break Even – at this the point the business is not making a Profit nor incurring a Loss – it is merely covering its Total Costs Break-Even Analysis SP = Rs2.00 VC = Rs0.50 Unit cont = Rs1.50 FC = Rs600
- 10. Break-Even Chart Costs/Revenue Output/Sales FC VC TCTR (p = RS 2) Q1 Loss Profit BEP The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue (income) to cover its total costs.
- 11. Costs/Revenue Output/Sales FC VC TCTR (p =2) Q1 Q2 If we sell more than Break Even Point pie Q2 we start to make a Profit Margin of Safety Margin of safety shows how far sales can fall before losses are made. If Q1 = 1000 units sold and Q2 = 1800, sales could fall by 800 units before a loss would be made TR (p = 3) Q3 A higher price would lower the break even point and the margin of safety would widen Break Even Point is Q1 BEP Margin of Safety
- 12. Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point. It helps the management to estimate that how much their estimated sales can be reduced to even achieve some kind of profit from production and sales or how much costs can increase to even then company at profit point and can survive loss position. margin of safety = (current output - breakeven output)
- 13. All Fixed and Variable costs can be identified Variable costs are assumed to vary directly with output Fixed costs will remain constant Selling prices are assumed to remain constant for all levels of output
- 14. The sales mix of products will remain constant – break even charts cannot handle multi-product situations It is assumed that all production will be sold The volume of activity is the only relevant factor which will affect costs
- 15. Some costs cannot be identified as precisely Fixed or Variable Semi-variable costs cannot be easily accommodated in break-even analysis Costs and revenues tend not to be constant With Fixed costs the assumption that they are constant over the whole range of output from zero to maximum capacity is unrealistic
- 16. Price reduction may be necessary to protect sales in the face of increased competition The sales mix may change with changes in tastes and fashions Productivity may be affected by strikes and absenteeism The balance between Fixed and Variable costs may be altered by new technology

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