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Break Even Analysis


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This is study about BEP.

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Break Even Analysis

  2. 2. BEA - Meaning<br />A break even analysis indicates that at what level of output, cost and revenue are in equilibrium<br />Martz, Curry and Frank<br />significance of having greater productive capacity to lower costs and maximize profits or contribution<br />
  3. 3. Assumptions-BEA<br />Two categories of cost - TC & VC<br />Linear relationship between TC & output<br />Price remains constant at different levels of sale<br />Prices of input factors constant<br />Cost is related with Output level<br />Production & Sales are synchronised<br />Product-mix should be stable for multi-product firms<br />
  4. 4. Break-Even Graph<br />
  5. 5. Terminology <br />BEP<br />graph showing variation in TC at different levels of output as well variation in TR<br />BEC<br />Sales revenue = Cost<br />Angle of Incidence<br />Point which the total revenue line intersects the total cost line<br />
  6. 6. Termin…<br />Margin of Safety<br />Margin of safety = Budgeted sales – Sales at BEP<br />Margin of safety expressed as:<br />Ratio of budgeted sales to sales at BEP<br />Ratio of actual sales to sales at BEP<br />Percentage of budget to BEP<br />Percentage of actual sales at BEP<br />Percentage of difference between actual sales and break even sales to budgeted sales<br />
  7. 7. Termin…<br />Margin …<br />Measures for unsatisfactory margin of safety<br />Increase in the sale price<br />Reduction in fixed costs<br />Reduction in variable costs<br />Increase in output<br />Stop production of non-profitable items<br />
  8. 8. Termin…<br />Profit-Volume Ratio<br />Contribution of sales <br />Determine most profitable selling area, line of product/method of distribution<br />To determine the real position of profitability <br />Uses<br />Determination of BEP<br />Identify the profit<br />Identify the sales volume<br />
  9. 9. Break Even Chart<br />Graphical representation of sales & costs at different levels of output<br />Study the relationship of output & sales to profit<br />
  10. 10. BEC- Uses<br />Profit & expenditure analysis<br />Cost-Volume-Price relationship<br />Determination of BEP<br />Sales on cost of production and profits<br />P-V ratio & margin of safety <br />Comparison of budget with actual sales & profit as variations in revenue/costs<br />Determining optimum level of output<br />
  11. 11. Limitations -Break Even Analysis<br />Omission of other factors <br />Fixed proportion of FC & VC with different levels of output<br />Assumptions of producer’s market phenomenon<br />Shift in product-mix<br />
  12. 12. Advantages - BEA<br />Forecasting<br />Decision making<br />Determination of sales & cost of production<br />Policy making<br />
  13. 13. Application - BEA<br />Determination of profits at different levels of profit<br />To find the level of output<br />Determination of margin of safety<br />Effect of price reduction on sales volume<br />