This document provides information on break-even analysis including definitions of key terms, calculations, and examples. It defines a break-even point as the volume of output where there is no profit or loss. The break-even point can be found by drawing a chart showing the relationship between total costs and total revenues. The document also discusses the importance of concepts like margin of safety and how changing variables like fixed costs, variable costs, or revenues impacts the break-even point. Examples are provided to demonstrate calculating break-even quantity, profit, and margin of safety using given cost and revenue information.

1. A PROJECT REPORT ONBREAK EVEN CHART
BREAK-EVEN CHART
BY
INDRAKUMAR R PADWANI
B.E. MECHANICAL , M.B.A MARKETING, P.G.D.C.A.
LECTURER IN MECHANICAL ENGINEERING
DEPARTMENT,
GOVERNMENT POLYTECHNIC, GODHRA, GUJARAT

2. Break-Even chart
• A break-even chart is a graphical presentation of the relationship between
the cost and income (sales revenue) at a given time. It is a graphical device
to the break-even point and potential of profit under the conditions of
variable costs and output production.
• Break-even chart is a synthetic tool to production management and
management accountancy. The modifications of this chart that introduce
risk, make it more useful tool for the synthesis of the production
management field. In order to obtain a clear position of the business, it is
important to construct this chart. It indicates the point at which there is no
loss or no profit, hence earning of a company can be said as just sufficient to
cover the expenses.

3. Break-Even Point
• A break-even point is a point at which the volume of output at which neither
a profit is made nor a loss is incurred. At this point the revenues and costs
agree exactly have the term “break-even” term is used for this point. Break-
even point can be found out by drawing break-even chart.

4. Break-Even Point
• In this chart the point “E”, where the total cost line and sales revenue line
intersect each other is called break-even point. The quantity Q1 produced
fitting to the break-even point “E” is called break-even quantity. (B.E.Q)
• In fig 2.2 break-even chart is shown in which quantity of production is shown
on x-axis and total cost and sales revenue are shown on y-axis. The point
“E”, the point of intersection of total coast-line and sales revenue line is the
“Break-even point”. This point E is also known as ‘No profit No loss’ point.
For this condition the Q1 on the line OX is showing the required quantity of
production for break-even. When the quantity produced is more than Q1,
the profit can be earned. If the quantity of production is less than Q1 then
the loss is incurred. In this fig. the income & cost are equal is the point E,
which is known as break-even point.

5. Need or Importance of B.E.P in Industry
B.E.P is need because it helps to solve following problems:
1. The volume of sales required to cover.
(i) a reasonable return on capital investment.
(ii) the ordinary & preferential dividends.
(iii) the reserves.
2. Computing the income and cost for all possible volume if production to
decide the budgeted sales.
3. To fix the price of the production for earning desired profit.
4. To calculate the variable cost per product

6. Need or Importance of B.E.P in Industry
5. It highlights the areas of economic strengths & weaknesses.
6. It helps to fix volume of production required to attain targeted profit.
7. The effect of the change of price can be studied.
8. It helps in taking make or buy decision.
9. It helps in selecting production machinery to get maximum profit.
10.To take decision for improving profit by increasing sales, increasing selling
price, reducing variable costs & reducing fixed cost.

7. Calculation of B.E.P Analytically
Let Q = Volume of production at B.E.P
Q1 = Volume of production required for the plant
F = Fixed cost
a = Variable cost per product
V = Total variable cost
b = Selling price per product
Ct = Total cost of production
S = Total sales revenue
Z = Profit or Loss.

8. Calculation of B.E.P Analytically
Total cost of production = Ct = Fixed cost + Variable cost
Therefore, Ct = F + V
= F + aQ
Total sales revenue, S = b x Q
At break-even condition
Total production cost of product =Total sales revenue
Therefore, Ct = S
F + a.Q = b.Q
F + b.Q - a.Q
F = Q ( b - a)`
Therefore,
Q = F
( b – a )
= break-even quantity
(B.E.Q)

9. Margin of safety, its importance and derivation
This is shown on the chart by the distance between B.E.P and the output being
produced. It shows that if this distance is short then a small decrease in output
or sales will reduce profit greatly. If the distance is long it means the business
could still be making profit after a great reduction in distance.

10. Margin of safety, its importance and derivation
Let Q1 = Break-even production quantity.
Q2 = Actual quantity of production
If Q2 > Q1 , then (Q2 - Q1) production quantity is called quantity of
safety.The ratio of this safety quantity (Q2 - Q1) and break-even production
quantity Q1 is called the margin of safety or sales more than break-even sales
is called margin of safety.
Margin of safety = = or - 1
(Q2 - Q1) Q2
Q1 Q1

11. Margin of safety, its importance and derivation
From the fig. 2.3 in BEA and BDC
= But BD = Q2 - Q1
BE = Q1
= CD = Z profit
AE = F
Margin of safety = = =
(Q2 - Q1) Z
Q1 F
BD CD
BE AE
Q2 - Q1 Z
Q1 F
Profit or loss
Fixed cost

12. Margin of safety, its importance and derivation
Margin of the safety shows the safety of business. More safety margin is
desirable because the profit can be earned even though there will be some
reduction in production or sales. Therefore, it is necessary to have the margin
of safety to run the business profitably. The expression for calculating the
ratio of margin of safety is as under :
Ratio of safety margine = x 100
= x100
safety margin
sales
Actual Sales – B.E.P. sales margin
sales

13. Effect of changing various parameters on B.E.P
The change in following factors affects the B.E.P. :
1. If fixed cost “F” decreases.
2. If fixed cost “F” increases.
3. If variable costV is decreases.
4. If variable costV is increases.
5. If sales revenue increases.
6. If sales revenue decreases.

14. (1) If fixed cost “F” decreases:
Due to decrease in fixed cost, the new line A1D1
will represent the fixed cost and total cost line
will be A1B1 instead of AB. Due to this change –
(i) Break-even point “E” will shift towards left
side.
(ii)To maintain the same profit, the production
volume can be decreased by Q1 - Q2
(iii)If the production is kept equal to previous
volume of production, then the profit will
increase.

15. (2) If fixed cost “F” increases:
If fixed cost increases, then it can be shown by
new line A1D1 and total cost line will be A1B1
instead ofAB. Due to this change –
(i) Break-even point “E” will shift towards right
side.
(ii)To maintain the same profit, as per original
profit the volume of production is to be
increased by (Q2 - Q1)
(iii)If the production volume is kept as it is , then
the profit will reduce or less will be incurred.

16. (3) If variable cost “V” is decreases:
Due to reduction of variable cost, the new
variable cost line ON1 will be obtained instead of
ON & total cost line will be A1B1 Instead of AB.
Due to this change –
(i) Break-even point will shift towards left side.
(ii)To maintain the same profit, the volume of
production can be reduced by (Q1 - Q2 )
(iii)Maintaining same volume of production
profit will increase.

17. (4) If variable cost is Increased:
Increase in variable cost will give new line ON1
for variable cost instead of ON. Total cost line will
be A1B1 Instead of AB. Due to this change –
(i) Break-even point “E” will shift towards right
side.
(ii)To maintain the same profit, it is necessary
to increase the volume of production by
(Q2 - Q1)
(iii)If the same volume of production is
maintained, then the profit will reduce or
there will be the loss.

18. (5) If sales revenue is Increased:
Due to increased sales revenue, sales line will be
OC1 will be obtained instead of OC. As per the
change –
(i) Break-even point will shift towards left side.
(ii)To maintain the same profit, the volume of
production can be decreased by (Q1 - Q2 )
(iii)Keeping same volume of production, the
profit will increase.
As the sales increase, the selling cost also
increases, which results into increased total cost.
Due that B.E.P tends to shift towards right side.
This effect is also t be considered in this case.

19. (6) If sales revenue is decreased: :
As the sales revenue is decreased , the sales
revenue line will be OC1 instead of OC. As per the
change –
(i) B.E.P will shift towards right side.
(ii)To maintain the same profit, it is necessary
to increase the volume of production by
(Q2 - Q1)
(iii)Keeping same volume of production, profit
will reduce or loss will be incurred.

20. Examples on B.E.P
1. The fixed cost of a company is Rs. 60,000. Sales price of unit is Rs. 30 and
variable cost of unit is Rs. 10. Find the total price and safety margin when total
production is 15000 units.
Solution:
Fixed cost, F= Rs.60,000 Selling price/unit = b = Rs. 30
Variable cost per unit, a = Rs. 20 Total production = 15000 units.
(1) Brake-even point, B.E.P = = = 6000 units.
(2)Total cost = Ct = Fixed cost + variable cost/unit xTotal units produced
= 60,000 + (20 x 15000)
= Rs. 3,60,000
f
b - a
60,000
30 - 20

21. Examples on B.E.P
3) Total revenue = Ct = Selling price xTotal units produced
= 30 x 15000
= Rs. 4,50,000
4) Profit = Total revenue - Total cost
= 4,50,000 - 3,60,000
= Rs. 90,000 … Ans. 1
5) Margin of safety = = = = 1.5 …. Ans.
15,000 - 6000
6000
(Q2 - Q1)
Q1

22. Examples on B.E.P
2. A company is manufacturing certain components is at present operating at 50%
of the production capacity. Other details are as under :
- Maximum production capacity - 20,000 components.
- Direct material cost = Rs. 1.00 / component
- Fixed cost Rs. 40,000 - Direct labour cost - Rs. 1.00 / unit
- Selling price of product is Rs. 7.00 per unit
A foreign company offers to purchase 5000 components at Rs. 5.00 per component
whether you will accept the order or not as an owner of the company and why ?
Solution:
F= Rs.40,000 Selling price/unit = b = Rs. 7 / unit
Maximum capacity = 20,000 units

23. Examples on B.E.P
Operating at 50% = 10,000 units produced a =Variable cost / unit = Direct material cost + Direct
labour cost = 1 + 1 = Rs. 2
1) Brake-even point, B.E.P = Q1 = = = Rs. 70,000
2) Profit on 10,000 units at 50% capacity.
Total sales revenue = 10,000 x 7 = Rs. 70,000.
Total production cost = Fixed cost + variable cost
= 40,000 + 2 x 10,000 = Rs. 60,000
Therefore, profit = sales revenue - Production cost
= 70,000 - 60,000 = Rs. 10,000
F
b - a
40,000
7 - 2

24. Examples on B.E.P
3) Now profit by producing 5000 units @ Rs. 5 selling price for foreign co.
Total sales revenue = 10,000 x 7 + 5000 x 5
= Rs. 95,000
Total production cost = 40,000 + 2 x 15,000 = Rs. 70,000
Profit = 95,000 - 70,000 = Rs. 25,000
The order of foreign company should be accepted, because the demand of units can be
produced within the spare capacity of 50% available. Again by producing units after accepting
the order in question profit is increases from Rs. 10,000 to Rs. 25,000.
Hence, more profit of Rs. 15,000 can be earned.