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# PPT on break even analysis

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### PPT on break even analysis

1. 1. Cost-Volume-Profit Analysis It is the study of effects of the changes in the costs and volume on the profit of the company. this study is important for the management as it helps in taking vital decisions such as pricing of the product, determining product mix, choice of the production facility etc. It also helps the manager in deciding the volume of production because the higher the volume of production, the lower the total cost per unit. Thus, volume affects the costs and in turn costs affect the profit.
2. 2. Cost-Volume-Profit AnalysisAssumptions:►All costs can be accurately classified either into fixed costs orvariable costs►All cost and revenue behaviour is linear►All costs are affected by changes in activity only►All units produced are sold, i.e. there is no unsold stock►In cases when more than one type of product is sold, the salesmix will remain constant.
3. 3. Cost-Volume-Profit AnalysisCVP income statement is sometimes also called ‘marginalcosting statement’CVP income statement: Total sales Less Variable Cost = Contribution Less Fixed Costs = Profit Selling Price = Total Cost + Profit
4. 4. Profit-Volume Ratio or Contribution Margin RatioP/V Ratio is the measure of the contribution per everyrupee sold, to cover fixed cost and to generate profit. P/V Ratio = (Sales – Variable Cost) ------------------------------- X 100 SalesOr, = Selling Price per unit – Variable Cost per unit ------------------------------------------------------------------ X 100 Selling Price per unit
5. 5. Break-Even Analysis TR TC Profit VCCosts/RevenueLoss FC Q1 Output/Sales
6. 6. Break-Even PointG.R. Crowningshield: Break even point is the point at which sales revenueequals the cost to make and sell the product and no profit or loss is reported.This is why this point is called as ‘no profit no loss point’.If volume of output and sales is less than the break-even level, the businesswill incur a loss. Fixed Costs BEP = ------------------------------------------- (in units) Selling Price p.u. – Variable Cost p.u.Or, Fixed Costs BEP = -------------------- (in units) Contribution p.u.Or, Fixed Costs BEP = -------------------- (in value) P/V Ratio
7. 7. Break-Even Analysis A higher price or lower price does not mean that break even will never be reached. The Break even point depends on the number of sales needed to generate revenue to cover costs. Example 1: Fixed Cost = Rs.24,000 Selling Price = Rs.100 p.u. Variable Cost = Rs.40 p.u. Example 2: Fixed Cost = Rs.10,000 Sales = Rs.40,000 Variable Cost = Rs.24,000 Units sold = 4,000
8. 8. Margin of Safety Margin of Safety (MOS) is the difference between the actual sales and the sales at the break-even level. Margin of Safety = Actual Sales – Break-even SalesOr, Profit Profit X Sales MOS = ---------- = -------------------- P/V Ratio Contribution The size of MOS is a very important indicator of the soundness of a business. Common cause of lower MOS is higher fixed costs.
9. 9. Break-Even Analysis TR TC VC BEPCosts/Revenue Margin of safety shows how far sales can fall before losses made. Margin of Safety FC Q1 Q2 A higher price would lower the break even point and the margin of Output/Sales safety would widen
10. 10. Break-Even AnalysisLinks of Break-even to pricing strategies and elasticity: Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break evenElasticity – what is likely to happen to sales when prices are increased or decreased?Higher prices might mean fewer sales to break-even but those sales may take a longer time to achieve.Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even

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