Break Even Analysis

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  • Study of interrelationships among a firm’s sales, costs, and operating profit at various levels of outputIt reveals the relationship between volume & cost of production @ one hand & the revenue & profit obtained from the sales on other hand BEA is a technique used for profit planning & control Incase of BEA BEP is of particular importance break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.Break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service
  • It indicates the minimum level of production/ Sales which the company has to undertake in order to be economically viable
  • It helps the management in visualizing profit & loss implications @ diff level of sales …Total revenue is shown as linear as it assumes that price is constant
  • The cost Curve in Break even chart can be prepared in 2 ways 1 Analytical Approach –uses information of one single income statement , here management classifies the cost info of 1 single income statement into those costs that are fixed & those that r variable 2 Statistical Approach – Management Gather information form series of income statement of the succeeding years , The Different level of output & the corresponding costs plotted on a scatter diagram , & then the best fit line is drown through these points on the scatter diagram to ge a total cost line
  • Break Even Analysis

    1. 1. The Break Even Point And Its Economic Significance<br />
    2. 2. As an entrepreneur, what you want to know?<br />How many goods do<br /> we have to sell before <br />we start making money?<br />If we sell 100,000 units, <br />what will our profit be? <br />What will be more profitable make or buy? <br />
    3. 3. The answer to all of these is …<br />Breakeven Analysis:<br />A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.<br />
    4. 4. Break even analysis<br />It is a planning and control technique.<br /> 1) Planning: Make informed decisions<br />2) Control: Constant checks<br />
    5. 5. Break even point <br />A break even point indicates at what level cost & revenue are in equilibrium<br />It is a point of indifference, where losses cease to occur while profit have not yet begun <br />
    6. 6. Concept of break even analysis<br /><ul><li>Fixed costs
    7. 7. Variable costs
    8. 8. Contribution Margin
    9. 9. Revenue
    10. 10. Profit</li></li></ul><li>Assumptions <br /><ul><li> All cost are either perfectly variable or absolutely fixed
    11. 11. Volume of production & volume of sales are equal
    12. 12. Sales price of product is constant
    13. 13. Constant rate of increase in variable cost
    14. 14. No improvement in technology & labor efficiency
    15. 15. Changes in input prices are ruled out </li></li></ul><li>Significance of break even point<br />Helps in determining-<br /><ul><li>The optimum level of output
    16. 16. The target capacity of a firm to get the benefit of minimum per unit production cost
    17. 17. Minimum cost for a given level of output
    18. 18. Selling price for a product
    19. 19. Establishing the point from where the firm can start paying dividend to share holders</li></li></ul><li>Significance of break even pointcont….<br />Helps in Analyzing -<br /><ul><li>Impact of new product launch
    20. 20. Impact of Purchasing new capital equipment
    21. 21. Should one make, buy or lease capital equipment
    22. 22. Revenue & cost implications of changing the process of production
    23. 23. Impact of changes in price & cost on profit of the firm </li></li></ul><li>Methods of representing BEP<br />BEP<br />Graphical<br />Algebraic<br />Analytical<br />Statistical<br />
    24. 24. Graphical method<br />
    25. 25. Choice of approach <br /><ul><li>Analytical Approach
    26. 26. Statistical Approach </li></li></ul><li>Algebraic approach<br /><ul><li> Break even point (of output)</li></ul> = (Fixed cost) / (Contribution per unit) <br /> Where,<br /> Contribution = Selling price - Variable cost<br /> Fixed cost = Contribution - Profit<br />
    27. 27. Algebraic approach contd…<br />Break even point of sales <br />1. Fixed Cost x SP per unit<br /> Contribution per unit<br /> Fixed cost x Total sales<br />Total contribution<br />
    28. 28. Break Even Analysis of Surf<br />Total Sales<br />Total Variable Cost<br />Total Fixed Cost<br />
    29. 29. Break even analysis<br /> <br />Break even(2005) = <br />Fixed cost x Total sales<br /> Total contribution<br />= RS 5,991,714 <br />Break Even(2004) = Rs 7,521,253 <br />Break Even (2003) = Rs 6,808,887 <br />
    30. 30. Break even analysis<br />TC<br />Revenue<br />VC<br />FC<br />Sales<br />2004<br />2005<br />2003<br />
    31. 31. Break even analysis<br />TC<br />Costs<br />VC<br />Profit<br />Loss<br />FC<br />Sales<br />2004<br />
    32. 32.
    33. 33. Rajiv Gandhi Setu<br />A classic example of break even Failure<br />What went wrong ?<br />Increase in the initial project cost from Rs 1300 cr. to Rs 1650 cr.<br />Project 65,000 vehicles to use the bridge, but only 40,000 actually taking it<br />High toll tax<br />
    34. 34. <ul><li>The result:</li></ul>Fell short of the daily break even collection of s 20 lakhs by nearly Rs 4 lakhs<br /><ul><li> Strategies applied:</li></ul>Convince BEST to change route of its 300 odd buses, and use the bridge<br />Collection of Rs 3000 – Rs 5000 per bus per month<br />Come out with monthly and daily passes<br />Recently, they have planned to increase the toll tax<br />
    35. 35. Jumbo King Vada pav<br />A classic example of break even Success and sustenance<br />Early days:<br /><ul><li>First outlet in 1990 and spread to nearly 45 outlets in the city.
    36. 36. Chose the method of Franchisee model like McDonalds with networking and stringent quality control.
    37. 37. 15% of revenue is generated in form of fees from the franchisee owners.</li></li></ul><li>Cost incurred<br /><ul><li>Franchisee purchase cost = 18lacs (One time)
    38. 38. Fixed cost </li></ul>Rent and electricity cost = 50000 pm<br />Salaries = 30000 pm (Cook and attendant)<br />Machinery = 400000 (One time cost )<br /><ul><li>Variable cost </li></ul>Food and beverages = 500000 pm <br />Other items = 10000 pm (Including glass / tissue papers etc)<br /><ul><li>Selling price </li></ul>Ranging from 8-20 Rs <br />
    39. 39. Current situation<br />Average demand:<br /> 5000 Vada pavs per day<br />Average revenue:<br /> 60,000 per day <br />Projected break even period <br /> 4 months<br />
    40. 40. Strategies applied<br /><ul><li>Launch the outlets near railway stations.
    41. 41. 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.
    42. 42. Turnover of Rs 40 lakh in its first full year of operation. (first ever store)
    43. 43. The company has a turnover of Rs 8 cr (under $2 million) as on date!
    44. 44. All the money from the first outlet is used to buy the second outlet.</li></li></ul><li>

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