This presentation discusses about the following topics: What is Break-Even analysis Formula Example Why Break-Even Analysis When to use Break-Even Analysis Uses of Break-Even Analysis

1. Dr. C.V. Suresh Babu
(CentreforKnowledgeTransfer)
institute

2. • What is Break-Even analysis
• Formula
• Example
• Why Break-Even Analysis
• When to use Break-Even
Analysis
• Uses of Break-Even Analysis
Discussio
n
(CentreforKnowledgeTransfer)
institute

3. • A break-even analysis is an
economic tool which is used to
determine the cost structure of a
company or the number of units
needs to be sold to cover the
cost.
• Break-even is a circumstance
where a company neither makes
a profit nor loss, but recovers all
the money spent.
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• Break-even analysis is used to examine the relation between the
fixed cost, variable cost, and revenue.
• Usually, an organization with low fixed cost will have a low break-
even point of sale.

4. 4
A break even point
analysis is used to
determine the
number of units or
Rupees needed to
cover total costs
(fixed and variable
costs).
Break Even Analysis in refers to the point in
which total cost and total revenue are equal

6. Therefore, to determine the break-even point of Companies premium pen will be:
= ₹1,00,000 / (₹12 – ₹2) = 10,000
Note: Hence, given the variable costs, fixed costs, and the selling price of the pen, Company would need to sell
10,000 units of pens to break even.
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Weldon Co. sells Pen. The company first determined that the fixed costs of Company are
• a lease,
• property tax,
• salaries,
which make a sum of ₹1,00,000.
The variable cost linked with manufacturing one pen is ₹2 per unit.
So, the pen is sold at a premium price of ₹10.

7. • Manages the Size of Units to be Sold: With the help of break-even analysis, the company or
the owner comes to know how much units need to be sold to cover the cost. The variable
cost and the selling price of an individual product and the total cost are required to evaluate
the break-even analysis.
• Budgeting and Setting Targets: Since a company or the owner know at which point a
company can break-even, it makes it easy for them to fix a goal and set a budget for the firm
accordingly. This analysis can also be practised in establishing a realistic target for a
company.
• Manage the Margin of Safety: In financial breakdown, the sales of a company tends to
decrease. The break-even analysis helps the company to decide the least number of sales
required to make profits. With the margin of safety report, the management can execute a
high business decision.
• Monitors and Controls Cost: Companies profit margin can be affected by the fixed and
variable cost; therefore, with break-even analysis, the management can detect if any effects
are changing the cost.
• Helps Design Pricing Strategy: Break-even point can be affected if there is any change in the
pricing of a product. For example, if the selling price is raised, the quantity of the product to
be sold to break -even will be reduced. Similarly, if the selling price is reduced, a company
needs to sell extra to break-even.

8. is Break even analysis
used?
• New Business: For a new venture, break-even analysis is essential. It guides the
management with pricing strategy and be practical about the cost. This analysis also
gives an idea if the new business is productive.
• Manufacture New Product: If an existing company is going to launch a new product,
they still have to focus on break-even analysis before starting, and see if the product
adds necessary expenditure to the company.
• Change in Business Model: Break-even analysis works even if there is a change in
any business model, like shifting from retail business to wholesale business. This
analysis will help the company to determine if the selling price of a product needs
change.
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9. • It helps to determine remaining/unused
capacity of the company once the breakeven is
reached. This will help to show the maximum
profit on a particular product/service that can
be generated.
• It helps to determine the impact on profit on
changing to automation from manual (a fixed
cost replaces a variable cost).
• It helps to determine the change in profits if the
price of a product is altered.
• It helps to determine the amount of losses that
could be sustained if there is a sales downturn.
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10. Additionally, break-even analysis is very useful
for knowing the overall ability of a business to
generate a profit.
• Therefore, it's the management responsibility to monitor the breakeven point constantly.
• This monitoring certainly reduces the breakeven point whenever possible.
In the case of a company whose breakeven point is near to the
maximum sales level, this signifies that it is nearly impractical
for the business to earn a profit even under the best of
circumstances.
(CentreforKnowledgeTransfer)
institute