This document provides an overview of break even analysis for a management accounting class. It defines break even analysis as a tool that determines the sales volume needed for a business to start making a profit. It then discusses key break even analysis concepts like fixed and variable costs, how to calculate the break even point using the contribution margin approach, how to determine the margin of safety, and how target profits can be incorporated. The document also provides examples of calculating break even points and sales levels needed for a target profit. It concludes by discussing limitations of break even analysis and comparing absorption and marginal costing approaches.

1. BREAK EVEN ANALYSIS
BACHELAR OF COMMERCE
BANKING AND INSURANCE
SEMISTER- 3
ACADEMIC YEAR- 2013-14
PRESENTED BY GROUP 2
MANAGEMENT ACCOUNTING

2. Group Members
NAMES
Mansi
Trushna desai
Aswini gije
Maheshwari gummapu
Gauri
Anuradha joshi
Kunal kadam
Roll no's
208
209
210
211
212
213
214

3. Introduction
Break even calculator
Uses of break even analysis
Formula
Key terminology
Margin of safety
Example
Target profit
Limitation
Absorption v/s marginal costing
CONTENTS

4. As an entrepreneur, what you want to know
• How many goods do
we have to sell before
we start making money
If we sell 1,00,000 units.
what will our profit be?
What will be more profitable?
make or buy?

5. The answer to all of these is…..
Breakeven Analysis:
A decision making aid that enables
a manager to determine whether a
particular volume of sales will result
in losses or profits.

6. Introduction
A breakeven analysis is use
d to determine how much
sales volume your business
needs to start making a
profit.
The break even analysis is e
specially useful when you
are developing a pricing str
ategy, either as part of a
marketing plan or a busine
ss plan.

7. Break even analysis
• It is a planning and control technique.
1)Planning: Make informed decisions.
2)Control: Constant Checks.

8. Cost
• Fixed (Indirect/Overheads) – are not influenced
by the amount produced but can change in the long run e.g., insu
rance costs, administration, rent, some types of labour costs (sala
ries), some types of energy costs, equipment and machinery, buil
dings, advertising
and promotion costs
• Variable (Direct) – vary directly with the amount produced, e.g.
, raw material costs, some direct labour costs, some direct energy
costs
• Semi-fixed – where costs not directly attributable to either of the
above, for example, some types of energy and labour costs

9. Uses of Breakeven Analysis
• C-V-P analysis is an important tool in terms of short
-term planning and decision making
• It looks at the relationship between costs, revenue, o
utput levels and profit
• Short run decisions where C-V-P is used include
choice of sales mix, pricing policy etc.

10. Break-even Analysis
• The break-even point can be found using the following
equation:
B.P = Fixed cost
contribution margin
= Fixed cost
selling price/unit

11. Key terminology: Break even analysis
• Break even point :-
• Contribution per unit :-
• Margin of safety :-
• Margin of cost :-

12. Margin of Safety
• The difference between budgeted or actual sales and the br
eakeven point
• The margin of safety may be expressed in units or revenue t
erms
• Shows the amount by which sales can drop before a loss wil
l be incurred
Formula:- MOS(Rs) = Actual sales –BEP sales
Mos(units) = Mos sales
selling price per unit

13. Example 1
Using the following data, calculate the
breakeven point and margin of safety in units:
 Selling Price Per unit = 50
 Variable Cost Per unit = 40
 Fixed Cost = Rs 70,000
 Budgeted Sales = 7,500 units

14. Example 1: Solution
Contribution per unit
= selling price per unit – variable cost per unit
= 50 – 40 = 10 per unit
Breakeven point = Fixed cost
contribution per unit
= 70,000
10
= 7000
Margin of safety = Actual sales (units) - BEP( units )
= 7,500 – 7000 = 500 units

15. Target Profits
• What if a firm doesn’t just want to breakeven – it requires a
target profit
• Contribution per unit will need to cover profit as well as fix
ed costs
• Required profit is treated as an addition to Fixed Costs

16. Example 2
Using the following data, calculate the level of
sales required to generate a profit of €10,000:
• Selling Price per unit = 35
• Variable Cost per unit = 20
• Fixed Costs = Rs 50,000

17. Example 2: Solution
• Contribution = Contribution per unit
= selling price per unit – variable cost per unit
= 35 – 20 = €15
• Level of sales required to generate profit of Rs10,000:
Required sales = Target profit + Fixed cost
contribution per unit
= 10,000 + 50,000 = 4000
15

18. Limitations of B/E analysis
• Costs are either fixed or variable
• Fixed and variable costs are clearly discernable over t
he whole range of output
• Production = Sales
• One product/constant sales mix
• Selling price remains constant
• Efficiency remains unchanged
• Volume is the only factor affecting costs

19. Absorption
Fixed costs included in Product
Cost
FC not treated as period cost –
closing/opening stock values
Under/over absorption of costs
Complies with Financial
Accounting standards
Marginal
Fixed costs not included in
Product Cost
FC treated as period cost
No under/over absorption of costs
Does not comply with Financial
Accounting standards
Absorption and Marginal Costing Compared