2. What is Break Even Analysis?
• The break-even point (BEP) in economics, business—and
specifically cost accounting—is the point at which total cost and total
revenue are equal. There is no net loss or gain, and one has "broken
even," though opportunity costs have been paid and capital has
received the risk-adjusted, expected return. In short, all costs that
must be paid are paid, and there is neither profit nor loss.
• Break even analysis (BEA) is also termed as cost – volume - profile
(CVP) analysis. It looks at how profit changes when there are changes
in variable costs, sales price, fixed costs and quantity.
3. Break Even Analysis
•Definition:
study of the mathematical relationship between costs and sales
revenue, under a given set of assumptions regarding the firm’s fixed
costs and variable costs.
4. Break Even Point
• A break even point indicates at what level cost & revenue are in
equilibrium.
• You are not losing or making a money.
5. Concept of Break Even Point
• Fixed costs
• Variable costs
• Contribution margin
• Revenue
• profit
6. Assumption of Break Even Point
• All cost are either perfectly variable or absolutely fixed
• Volume of production & volume of sales are equal
• Sales price of product is constant
• Constant rate of increase in variable cost
• Not improvement in technology & labor efficiency
• Changes in input prices are ruled out
9. Algebraic Method
• BEP in physical produced:
BEP is defined as the ratio of total fixed cost to the contribution
per unit. Here , contribution is define as difference between revenue
generated and variable cost incurred.
10. Algebraic Method
• BEP in terms of sales volume:
BEP is defined as the ratio of fixed cost to the contribution ratio.
Contribution ratio is the ratio of the total contribution to the sales. This
indicates the profile per units volume sold. So contribution ratio is also
known as p/v ratio.
12. Example Of BEA
Calculate the break-even point in sales units and if profit targated is
Rs.2000 then then how many units sales?
Price per unit Rs.15
Variable cost per unit Rs.10
Total fixed cost Rs.9000
Solution:
13. Limitations of BEP
• Assume that sales prices are constant at all levels of output.
• Assume production and sales are same.
• Break even charts may be time consuming to prepare.
• It can only apply to a single production or single mix of products.
