Me   Break Even Cvp
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  • 1. C-V-P ANALYIS (Cost – Volume – Profit) OR BREAK-EVEN ANALYSIS
  • 2.
    • A firm is faced with a number of uncertainties
    • Demand (consumer behaviour)
    • Nature of competition (related to product or price or both) product competition is greater.
    • Cost (no control over wages, raw materials,
    • Indirect taxation)
    • Technology (continuous improvements make products obsolete)
  • 3.
    • Unless a firm is prepared to face the uncertainties created by these risks, its profits would be left to chance.
    • Under such circumstances, a thorough understanding of the relationship of
    • cost, price and volume is helpful.
    • Method of determining this relationship is
    • Break-even Analysis.
  • 4. Break-even analysis
    • Break-even analysis involves the study of revenues and costs of a firm in relation to its volume of sales and specifically the determination of that volume at which the firm’s costs and revenues will be equal.
    • The Break-even Point (BEP) is that level of sales at which total revenues equal total costs and the net income is equal to zero.
    • This is the no-profit-no-loss point.
  • 5. Objective of BEP
    • The main objective of the break-even analysis is not simply to spot the BEP, but to develop an understanding of cost, price and volume within a company’s practical range of operations.
    • The break-even chart is an “excellent instrument panel for guidance in controlling one’s business”.
  • 6. DETERMINATION OF BREAK-EVEN POINT
  • 7. Determination of Break-even Point
    • Physical Units.
    • Money Terms or
    • Sales Value
  • 8. BEP – Physical Units
    • Fixed Costs
    • BEP = --------------------------------------
    • (quantity) Contribution Margin per unit
    • Contribution margin = SP - AVC
    • At this point the company will not make any profit or loss.
  • 9.
    • BEP (Quantity) Example:
    • Problem :Suppose the fixed costs of a factory are Rs.10000 per year,
    • the variable costs are Rs.2 per unit and
    • selling price is Rs.4 per unit.
    • How many units the firm should produce in order not to make any profit or loss.
    • Solution:
    • We have to calculate the BEP.
    • Total Fixed Costs (TFC) = Rs.10,000
    • Contribution margin per unit = Selling price – Average variable cost.
    • (SP – AVC) = Rs. 4 – Rs.2
    • BEP = Total Fixed Costs  Contribution margin per unit.
    • BEP = TFC = 10000 = 10000 = 5000
    • SP-AVC 4-2 2
    • Break-even Point in terms of physical units or quantity = 5000 units.
  • 10. BEP (Sales Value)
    • Fixed Costs
    • BEP = ----------------------------------------
    • Contribution margin ratio
    • Contribution margin ratio = Sales - variable costs
    • Sales
  • 11.
    • BEP – IN TERMS OFSALES VALUE
    • Problem : Sales Rs.10000
    • Total Variable Costs 6000
    • Total Fixed Costs 3000
    • Contribution margin ratio = (10000 – 6000) 
    •  P = Fixed Costs .
    • Contribution margin ratio
    • = 3000 = 7500 Rs.7,500
    • 0.4
    • At Sales value of Rs.7500 there is no profit-no-loss.
  • 12.
    • Problem: Sales were Rs.15000 giving a profit of Rs.400 in a week. Sales increased to Rs.19000 giving a profit of Rs.1200. Calculate the BEP.
    • Solution:
    • Increase in sales 19000 – 15000 = Rs.4000
    • Increase in profit 1200 – 400 = Rs. 800
    • Increase in variable costs 4000 - 800 = Rs.3200
    • On sales of Rs.4000 variable costs are Rs.3200
    •  Variable cost for 1 rupee of sales Rs. 3200 
    •  Given sales of Rs.15000, fixed costs are as under:
    • TVC = 15000 x 0.8 = 12000
    •  Profit = 400
    • TVC + Profit = 12400
    • Sales Value = 15000
    • Fixed Cost = 2600
    • Now, Contribution ratio = S-V = 15000 – 12000 = 3000 = 0.2 S 15000 15000
    • Now, BEP = TFC  Contribution ratio = 2600/0.2 = Rs.13000.