slide on Break Even Analysis

1. Break Even Analysis
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Chemical Process Economics

2. INTRODUCTION
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➢A break even analysis is used to
determine how much sales volume
your business needs to start making a
profit.
➢The breakeven analysis is especially
useful when you're developing a
pricing strategy, either as part of a
marketing plan or a business plan.

3. BREAK EVEN POINT
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➢The break even point can be defined
as a point where total costs
(expenses) and total sales (revenue)
are equal. Break even point can be
describe as a point where there is net
loss or profit.
➢Total cost = Total revenue = B.E.P.

4. BREAK EVEN CALCULATER
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In order to calculate how profitable a
product will be, we must firstly look at
the Costs Price and Revenue involved.
➢ There are two basic types of costs a
company incurs.
➢ Variable Costs
➢ Fixed Costs

5. BREAK EVEN CALCULATER
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➢Variable Costs
Variable costs are costs that change with
changes in production levels or sales.
Examples include: Costs of materials used
in the production of the goods.
➢Fixed Costs
Fixed costs remain roughly the same
regardless of sales/output levels. Examples
include: Rent, Insurance and Wages.

6. BREAK EVEN CALCULATER
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➢Unit Price:
The amount of money charged to the
customer for each unit of a product or
service.
➢Total Cost:
The sum of the fixed cost and total variable
cost for any given level of production.
(Fixed Cost + Total Variable Cost )

7. BREAK EVEN CALCULATER
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➢Total Variable Cost:
The product of expected unit sales and
variable unit cost. (Expected Unit Sales *
Variable Unit Cost )
➢ Total Revenue:
The product of expected unit sales and unit
price. (Expected Unit Sales * Unit Price )

8. BREAK EVEN CALCULATER
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Profit/ loss
The monetary gain or loss resulting from
revenues after subtracting all associated
costs. (Total Revenue - Total Costs)

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10. COMPUTATION
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The break-even point (in terms of Unit Sales
(X)) can be directly computed in terms of
Total Revenue (TR) and Total Costs (TC) as:
TR = TC
P × X = TFC + VC × X
P × X ˗ VC × X = TFC
X =
Where
TFC is total fixed cost,
P is unit sale price and
V is unit variable cost

11. EXAMPLE (B.1)
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➢For example, suppose that for producing
100,000 product :
Fixed costs = 30,000 R.s
Variable costs per unit
Direct material = 2.20 R.s
Direct labor = 4.00 R.s
Direct overhead = 0.80 Rs
Total variable costs = 7.00 R.s

12. EXAMPLE (B.1)
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If selling price for each product is 12.00 R.s
then find BEP.
Solution:
BEP = TFC/P-V
BEP= 30,000/[12.00 – 7.00]equals 6000 units.
This is the number of products that have to be
sold at a selling price of 12.00 Rs before your
business will start to make a profit.

13. CONTRIBUTION MARGIN
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➢ Contribution Margin (CM) is the
difference between sales revenue and
variable costs. It is measure of the profit
margin that focuses on the proportion of
sales revenue which is left after the
deduction of variable costs
➢This is the amount which is left to cover
fixed expenses of an organization.

14. CONTRIBUTION MARGIN
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Contribution margin can be calculated by
using the following formula:
➢Contribution Margin = (sales revenue −
variable costs)
Contribution Margin Ratio also known as
p/v ratio
➢ (CMR) = (sales revenue − variable
costs)/ sales revenue

15. MARGIN OF SAFETY
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➢Margin of safety represents the strength
of the business. It enables a business to
know what is the exact amount it has
gained or lost and whether they are over or
below the break even point.
➢Margin o safety = actual sales – BEP
sales
➢ Margin of safety% = (current output -
breakeven output)/current output × 100

16. EXAMPLE (B.2)
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➢If unit sold 6000 unit then from following
given data:
Total Fixed costs = 14000 R.s
Selling price = 15 R.s per unit
Total Variable costs = 8 R.s per unit then
find following.
➢ Contribution
➢ Break even point
➢ Margin of safety

17. EXAMPLE (B.2)
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Solution:
Contribution (pu) = SP (pu) – VC (pu)
= 15 – 8 = 7 R.s (pu)
Contribution in sale = 90,000 – 48,000
= 42,000 R.s
P/V Ratio = SP - VC / SP * 100
= 15 – 8 / 15* 100 = 46.6% or
= 90,000 – 48,000/90,000*100

18. EXAMPLE (B.2)
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Break even point(unit) = TFC/SP – VC
BEP(unit) = 14,000/ 15 – 8 = 2000 unit
BEP in sale = TFC * SP/ Contribution ( S)
= 14,000 *90,000/42,000
= 30,000 R.s
Margin of safety = actual sale – BEP sale
= 90,000 – 30,000
= 60,000 R.s