This document defines and explains break even analysis. It lists the group members and contents. Break even analysis determines the level of output needed for total revenue to equal total costs. It discusses calculating break even points using fixed and variable costs. The purpose is to provide a rough earnings indicator. Limitations include not accounting for demand changes. Calculators are available to assist with break even calculations.

1. BREAK EVEN ANALYSIS
GROUP MEMBERS
 Nikhil Das M
 Gopi Nath
 Lalitha Ashok
 Mahindran
 Don

2. CONTENTS
 definition
 Purpose
 Construction/Computation
 Margin of safety
 Types of costs
 Break even analysis
 Limitations
 Available calculators for
calculating BEP
conclusion

3. DEFINITION
“Break even point (Bep) is the point
at which cost or expenses and
revenue are equal”
 There
is no net loss or gain
 All cost that need to by paid by the firm are paid
but the profit remains “zero”

4. Break Even Point (IN UNIT)= Fixed
Cost /S. Price- Variable Unit Cost
Break Even Point (in Rs)=Fixed
Cost/ S. Price-Variable unit
Cost*Units

5. Example:
XYZ co. ltd
1000 tables ( break even)
More than 1000 tables( profit )
Less than 1000 tables(loss )
Alternate option
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

7. purpose
The purpose of break-even analysis is to provide a
rough indicator of the earnings impact of a marketing
activity.
The break-even point is one of the simplest yet least
used analytical tools in management.
It helps to provide a dynamic view of the relationships
between sales, costs, and profits
The break-even point is a special case of Target Income
Sales where Target Income is 0 (breaking even).
This is very important for financial analysis.

8. Computation /construction of BEP
LINEAR COST-VOLUME-PROFIT ANALYSIS MODEL
Where, marginal cost and marginal revenue are constant BEP can be directly
computed in terms of total revenue(TR) and total cost (TC)
TFC is Total Fixed Cost
P is Unit Sale Price
V is Unit Variable Cost
.
X is BEP (in terms of unit sales)

9. Alternative method
Where,
Contribution equals Fixed Cost
Total Contribution=Total Fixed Costs
Unit Contribution X Number Of Units=Total Fixed
Costs
Number Of Units= Total Fixed Costs
Unit Contribution

10. MARGIN OF SAFETY
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
FORMULA
Margin of safety = (current output - breakeven
output)
Margin of safety% = (current output - breakeven
output)/current output × 100

11. Break-Even Analysis
Costs/Revenue
TR (p = £3)
TR (p = £2)
TC
VC
AAssumeprice
higher
would lower
current sales
the break
at Q2
even point
and the
margin of
safety would
Margin of Safety widen
FC
Q3
Q1
Q2
Output/Sales

12. Important things to be considered before
conducting break- even analysis
 FIXED COST
VARIABLE COST
SETTING PRICE
 PHYCHOLOGY OF PRICING
PRICING METHODS

13. Costs/Revenue
TR
TR
TC
VC
TheAs output is point
Break-even
Totallowercosts
The total the
The revenue is
occurs where total
generated, firm
Initially a
determined the
therefore less
revenue equalsby the
price,will incur
the total
firm charged and
will incur fixed
pricethe firm, in
(assuming
costs – thecosts –
variable total
steep these do –
costs,
the quantity sold
this accurate would
example
thesethis will
not vary
revenue curve.
again depend on
have to sell Q1 tobe
forecasts!) is the
directly or bythe
output with
determined sales.
generate sufficient
amount FC+VC
sum of forecast
expected produced
revenue to cover its
sales
costs. initially.
FC
Q1
Output/Sales

14. Break-Even Analysis
Costs/Revenue
TR (p = £3)
TR (p = £2)
TC
VC
If the firm
chose to set
price higher
than £2 (say
£3) the TR
curve would
be steeper –
they would
not have to
sell as many
units to
break even
FC
Q2
Q1
Output/Sales

15. Break-Even Analysis
TR (p = £1)
Costs/Revenue
TR (p = £2)
TC
VC
If the firm
chose to set
prices lower
(say £1) it
would need
to sell more
units before
covering its
costs
FC
Q1
Q3
Output/Sales

16. example,
suppose that your fixed costs for
producing 100,000 product were 30,000 rs a
year.
Your variable costs are 2.20 rs materials,
4.00 rs labour, and 0.80 rs overhead, for a
total of 7.00 rs per unit.
If you choose a selling price of 12.00 rs for
each product, then:
30,000 divided by (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.

17. LIMITATIONS
•Break-even analysis is only a supply-side (i.e., costs only)
analysis, as it tells you nothing about what sales are actually likely
to be for the product at these various prices.
•It assumes that fixed costs (FC) are constant. Although this is
true in the short run, an increase in the scale of production is likely
to cause fixed costs to rise.
•It assumes average variable costs are constant per unit of output,
at least in the range of likely quantities of sales. (i.e., linearity).

18. It assumes that the quantity of goods produced is equal to the
quantity of goods sold (i.e., there is no change in the quantity of
goods held in inventory at the beginning of the period and the
quantity of goods held in inventory at the end of the period).
In multi-product companies, it assumes that the relative proportions
of each product sold and produced are constant (i.e., the sales mix is
constant).

19. CALCULATORS
Case Western Reserve University offers a breakeven
analysis calculator that includes a review of relevant
microeconomic terms.
 financial calculator allows you to chart your costs and
profits appear in a graph.
Inc.com offers a breakeven analysis calculator that requires
a user to enter in total annual overhead and annual year-todate sales and cost of sales, and lets the user delineate the
period for the YTD calculations in terms of weeks

20. CONCLUSION
“Breakeven analysis is not a predictor of
demand, so if you go into market with
the wrong product or the wrong price, it
may be tough to ever hit the breakeven
point”