Production hard copy final

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Production hard copy final

  1. 1. DEPARTMENT OF BUSINESS MANAGEMENT A PROJECT REPORT ON BREAK EVEN POINT ANALYSIS UNDER THE GUIDANCE OF Prof: Vidya Page 1
  2. 2. SUBMITED BY: - NAME ROLL NO. SPECIALISATION LAXMI YADAV 01 BANKING & INSURANCE REETI SINGH 04 BANKING & INSURANCE RICKY SURI 05 BANKING & INSURANCE HITESH GOANKAR 10 BANKING & INSURANCE Page 2
  3. 3. INDEXSR.NO. TOPIC PAGE NO. 1. INTRODUCTION 04 2 DEFINITION 05 3 CALCULATION OF BREAK EVEN POINT 06 4 IMPORTANCE 09 5 ASSUMPTIONS 10 6 MARGIN OF SAFETY 11 7 ADVANTAGES & DISADVANTAGES 12 8 UTILITY 13 9 CONCLUSION 15 Page 3
  4. 4. INTRODUCTION In the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although opportunity costs have been "paid", and capital has received the risk-adjusted, expected return. In short, all costs that need to be paid are paid by the firm but the profit is equal to zero. For example, if a business sells fewer than 200 tables each month, it will make a loss, if it sells more, it will be a profit. With this information, the business managers will then need to see if they expect to be able to make and sell 200 tables per month. If they think they cannot sell that many, to ensure viability they could:- Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of telephone bills or other costs) Try to reduce variable costs (the price it pays for the tables by finding a new supplier) Increase the selling price of their tables. Page 4
  5. 5. DEFINITION Break even analysis is that point of capacity at which operations pass from profits to losses or vice versa .Break even are the mirror of business, nothing less, & nothing more. The study of the total cost, total revenue, & output relationship is known as break even analysis. It can be also termed as cost volume profit. It is also termed as cost volume profit analysis. According to Horngern: - The break even analysis is that point of activity (sales volume) where total revenue and total expenses are equal, it is the point of zero profit. Thus, breakeven point indicates a position or level of output in which revenues and costs break evenly, i.e. a stage of no profit and no loss. A business will have profit only when its volume of sales is more than breakeven point. 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 described as a point where there is no net profit or loss. Page 5
  6. 6. Calculation of Break-even Point There are three methods for the calculation of Break Even Point. 1. Equation Technique 2. Contribution Marginal Technique 3. Graphic Technique Equation Technique The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows: Page 6
  7. 7.  Sales = Variable Cost + Fixed Cost + Profit  Profit = (Sales − Variable Cost) − Fixed Cost  Profit = Contribution – Fixed Cost PROBLEMSFixed cost = Rs. 240000Sales per unit = Rs. 20Variable cost per unit =Rs. 8Calculate BEP in units, P/V ratio, BEP (in Rs.)BEP (in units) =fixed cost/contribution = fixed cost/sales-variable cost = 240000/20-8 = 240000/12BEP (in units) = 20000P/V ratio = contribution/sales * 100= 12/20*100 Page 7
  8. 8. = 60%BEP (in Rs.) = fixed cost/p/v ratio= 240000/60% =Rs. 400000 Fixed cost = Rs.90000P/V ratio = 25%Sales =Rs. 600000Calculate BEP(in Rs.) and margin of safetyBEP (in Rs.) = Fixed cost/ P/V ratio= 90000/25% = Rs.360000MOS = Actual sales – BEP sales = 600000 – 360000 = Rs.240000 Page 8
  9. 9. IMPORTANCE OF BREAK EVEN ANALYSISOne of the important indicators of success of the start-up company is the timefrom starting. The business till the moment when revenues of product salesequals the total costs associated with the sale of product – it is also calledbreak-even point. In other words profit = 0. Breakeven analysis is accountingtool to help plan and control the business operations.Breakeven point analysisis a very important tool. We dont make a profit until we cover all the variablecostsincurred, and all the fixed costs. The point at which this is reached isknown as the "breakeven point". And the more we sell after this point isreached, the more profit is made.Break-even point represents the volume of business, where company’s totalrevenues (money coming into a business) are equal to its total expenses (totalcosts). In its simplest form, breakeven analysis provides insight into whetheror not revenue from a product or service has the ability to cover the relevantcosts of production of that product or service. TOTAL REVENUE= TOTAL COSTS Page 9
  10. 10. ASSUMPTION OF BREAK EVEN POINTThe break even analysis is based on three assumptions:- Monthly fixed costs. Average per-unit sales price (per-unit revenue). Average per-unit cost. (1) Monthly fixed costs: -Technically, a break-even analysis defines fixed costs as costs that would continue even if went broke. If averaging and estimating is difficult, use Profit and Loss table to calculate a working fixed costestimate, it will be a rough estimate, but it will provide a useful input for a conservative Break-even Analysis. (2) Average per-unit sales price (per-unit revenue):- This is the price that you receive per unit of sales. Take into account sales discounts and special offers. The most common questions about this input relate to averaging many different products into a single estimate.The analysisrequires a single number, the vast majority of Page 10
  11. 11. businesses sell morethan one item, andhave to average for their Break-even Analysis. (3) Average per-unit cost:-This is the incremental cost, or variable cost, of each unit of sales. Forecast for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store running a 50% margin would have a per-unit cost of .5 and Per-unit revenue of 1. MARGIN OF SAFETYIt indicates the strength of a business. High margin of safety indicates thatprofits will be earned if there is a fall in selling price on the other hand if themargin of safety is small a decline in sales value will be a matter of greatconcern to the management in such situation management may require to takethe following decisions:-  Increase the selling price.  Increase the level of activity.  Reduce cost.  Substitute the existing product with more products with more profitable product. It is also popularly known as MS it is the excess of actual sales of production volume over the breakeven point.  If the MOS is large the business prospects are strong. If the MOS is small the business prospects are weak. The MOS could be improving by increase in the selling price which improve sales revenue or by reducing the cost. Page 11
  12. 12. ADVANTAGES OF BREAK EVEN ANALYSIS  The concept is of great asset to the people who are accountable for forecasting results.  It is an important tool for effective decision making to accomplish the desired objectives.  The impact of variations in sales and cost of production on profit can be determined.  Provides more realistic basis for policy making.  The point where from the payment of dividends should start can be determined by BEA  For some predetermined policy, BEA can give indications about the desired selling price.  Easy to understand and use.  Profit and loss is easy to calculate at different levels of output.  The impact of a change to cost can be measured by changing in TC line.  Can measure the impact of a price change by moving the TR line. Page 12
  13. 13.  Allows the company to carry out a “what if analysis”? DISADVANTAGES OF BREAK EVEN ANALYSIS  Is too simplistic that all prices/ costs are constant.  Any conclusions drawn are only as accurate as the data they are based on.  Assumes that all output is sold.LIMITATIONS OF BREAK EVEN ANALYSIS  With variation in the prices of the items or services, which also depends on the factors, affecting its demand and supply, will certainly affect the demand of its commodity. This phenomenon is not covered in break even analysis.  The fixed cost may not remain constant as well as the variable costs may not vary in fixed proportions at different levels of output.  Consumers may give certain discount on purchases to promote sales. Thus revenue may not be perfectly variable with level of sales output. Page 13
  14. 14.  The assumption of producer’s market phenomenon may not hold good for all types of commodities.  A shift in product mix may change the breakeven point. UTILITY OF BREAK EVEN ANALYSISIt is the most useful technique of profit planning and control. It is a device toexplain the relationship between the cost volumes profit. The utility of break evenanalysis are the following:-  Provides detailed and understandable information:-Break even analysis is a simple concept to present and interpret accounting data. Many business executives and other are unable to understand accounting data contained in the financial statements and reports but break even visualizes information very clearly.  Profitability of product and business can be known: - The profitability of business can be known with the help of break even chart.  Effects of changing of costs and sales price can be demonstrated: - The changes of fixed and variable costs at different levels of production and profits can be demonstrated.  Cost control can be analyzed: - The relative importance fixed in the total cost of the product can be analyzed and if the total costs are high they can be controlled by the management. Page 14
  15. 15.  Economy and efficiency can be affected: - The capacity can be utilized to the fullest extent and economics of scale and capacity utilization can be affected. Comparative plant study can be studied on break even chart.  Diagnostic Tools: - It indicates the management the cause of increasing breakeven point and falling profit the analysis of these causes will reveal that what action should be taken. If breakeven point as a percentage of capacity . CONCLUSIONo We come to conclusion that BEP is most important for all the business.o Because it show that either they have to continue their business or not. Page 15

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