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1. DEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Break Even
Analysis
Vivek Kumar- 3714
Ankit Kumar- 3777
Vishwas Tomar- 3811
Soham Pandit- 3787

2. Financial break-even point
• Financial break-even point refers to the level of
sales or revenue a company needs to generate in
order to cover all of its expenses and reach a
zero-profit position.
• To calculate the financial break-even point, a
company must first determine its fixed costs,
variable costs, selling price, and its capital
structure, including interest rates and tax rates.

3. Formula
• Break-even point (in units) = Total fixed costs /
Contribution margin per unit
Alternatively
• Break-even point (in revenue) = Break-even
point (in units) x Sales price per unit
• Financial Break-Even Point = (Fixed Costs + Interest
Expense)
(1-Tax Rate)

4. Example
Suppose a company has fixed costs of $100,000 per year,
interest expenses of $20,000 per year, and a tax rate of 30%.
The variable cost per unit is $10, and it sells its product for
$15 per unit. The company's EBIT can be calculated as
EBIT = Revenue - Variable Costs - Fixed Costs - Interest
Expense
EBIT = $15x - $10x - $100,000 - $20,000
EBIT = $5x - $120,000
To calculate the financial break-even point
0 = $5x - $120,000
$5x = $120,000
x = 24,000 units

5. Assumptions Regarding Financial
break-even point
• Costs are classified as fixed or variable
• Linear relationship between costs and activity
• Sales mix remains constant
• Selling price remains constant
• The company operates in a single product or
service line

6. When to use the Financial
break-even point
• Planning and forecasting:- By calculating
the financial break-even point, a business
can forecast the minimum level of sales
required to cover all costs and make a profit.
• Pricing strategy:- Determine the minimum
price it needs to charge for its products or
services to cover all costs and make a profit.

7. • Cost control:- Understanding the financial break-
even point can help a business to identify areas
where it can reduce costs and increase efficiency.
• Investment decisions:- The financial break-even
point can be used as a benchmark for evaluating the
profitability of investment opportunities.

8. Terminologies
• Fixed costs: are those that do not change regardless
of the level of production or sales, such as rent,
salaries, and insurance.
• Variable costs: vary depending on the level of
production or sales, such as raw materials, direct
labor, and shipping.
• Contribution Margin: Excess of unit sale price over
unit variable cost

9. • P/V ratio : ratio of contribution margin per unit to
Selling Price per unit
• V/V ratio : ratio of variable cost per unit to Selling
price per unit
• V/V ratio = 1 – P/V ratio
• Margin of Safety: excess of actual sales revenue over
break even sales revenue
• M/S ratio = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 −𝐵𝐸𝑃 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
)/(𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒)

10. How to determine BEP
Contribution Margin approach
Consider a vendor wants to sell ice - cream in a fair
𝐵𝐸𝑃 𝑢𝑛𝑖𝑡𝑠 =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
, here Fixed cost = Entry fee + Installation cost
Unit cost 20
Selling Price 30
Permission to sell / Entry fee 8000
Installation cost 4000

11. BEP(units) =
8000+4000
30 −20
= 1200 units
BEP(amount) = 1200* 30 = ₹ 36000
P/V ratio =
10
30
= 33.33%
V/V ratio = 66.67%
M/S ratio = (60000-36000)/60000
= 0.4 or 40%
(Assuming the vendor sold 2000 units of ice cream)

12. BEP Application
Sales Volume required to produce desired operating
profit
Required sales = (Fixed expenses + Desired
operating profit)/ (P/V ratio)
If ice-cream vendor want an operating profit of
₹6000
Required sales = (12000 + 6000) / (1/3)
= ₹54000

13. Additional sales volume required to offset a reduction in selling
price
Let new selling price = ₹ 25
Sales volume required to maintain operating profit of ₹ 6000
would be :
=
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡+𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑃/𝑉 𝑟𝑎𝑡𝑖𝑜
=
6000+12000
5/25
= ₹ 90000

14. Multi Product Break Even Point
• As firms sell multiple products so weighted
average of all the variables is used.
• Assumption is that sales mix of the firm is
known and remain constant

15. Quick Coffee, a cafeteria that sells three types
of hot drinks: Classic coffee, espresso and hot
chocolate
Product Price Proportional
to total
revenue
Weighted
Average
Coffee 3.0 50%
Espresso 3.5 30%
Hot chocolate 4.0 20% 3.35
Product Variable Cost Proportional
to total
revenue
Weighted
Average
Coffee 0.5 50%
Espresso 0.6 30%
Hot chocolate 0.7 20% 0.57

16. Fixed Cost = 55000
BEP = 55000/ (3.35-0.57)
= 19784units
BEP for each product:
Classic Coffee = 19784 * 50% = 9892units
Espresso = 19784 * 30% = 5935units
Hot Chocolate = 19784 * 20% = 3957units

17. Effect of Changes in Fixed Costs
• A firm may be confronted with the situation of
increasing fixed costs
• External Factors:property taxes, insurance
rates, factory rent.
• Internal Factor: expansion of the present plant
capacity so as to cope with additional demand

18. The increase in the requirements of fixed costs
would imply the computation of the following
• Relative break-even points
• Required sales volume to earn the present
profits
• Required sales volume to earn the same rate
of profit on the proposed expansion
programme as on the existing ones

19. Formulae
• Proposed facilities = (Present FCs + Additional
FCs) /(P/V ratio)
• The required sales volume to earn the present
profit: [Present FCs + Additional FCs + Present
profit (NI)]/( P/V ratio)
• The required sales volume to earn the present
rate of profit on investment: (Present FCs +
Additional FCs + Present return on investment +
Return on new investment)/( P/V ratio)

20. Effect of Changes in Variable Costs
• An increase in the variable cost will lead to a
decrease in Contribution Margin and the P/V
ratio will fall.
• Hence there will be a increased BEP which will
lead to an increase in sales volume to
maintain existing profit.

21. Break even analysis-Graphical
• Break even chart is a graphic relationship
between volume cost and profits
• It also shows the effects of costs and revenue
at varying level of sales
• Also called VCP graph

22. Assumptions Regarding the VCP
Graph
1. Costs can be bifurcated into variable and
fixed components
2. Fixed costs will remain constant during the
relevant volume
3. Variable cost per unit will remain constant
during the relevant volume range of graph

23. Cont..
4. Selling price per unit will remain constant
5. In the case of multi-product companies it is
assumed that the sales-mix remains constant
6. Finally, production and sales volumes are
equal

24. Question

26. • The meeting point of the total cost line and
sales line is the BEP
• At this point, an angle is formed known as
the angle of incidence.
• The management objective should be to
have an angle of as large a size as
possible because a high angle is a sign of
a high rate of profit after the fixed costs
have been covered

27. Cont..
• The narrower angle will signify that profits
after the fixed costs have been covered;
the narrower angle will signify that profits
will increase at a lower rate after the BEP,
showing that variable costs form a large
part of cost of sales

29. • The graph is drawn with the details of the
individual segment of variable cost and is
more informative
• The steps involved in drawing the graph
include an additional step of adding variable
costs to the fixed cost
• This is to be repeated four times for four
different components: material, labour, direct
expenses and selling expenses. In fact, fixed
costs can also be further split-up into parts.

30. Application of the P/V Ratio
• Determination of BEP = FC/ P/V ratio
• Determination of profit at given/budgeted
sales volume = (Actual sales – BE sales)* P/V
ratio
• Determination of sales volume to earn
budgeted profit = (FC + DP) /P/V ratio

31. • Determination of change in sales volume to
maintain the current level of profit if there is
(a) a change in sales price, (b) change in
variable cost = (FC + DP)/ Revised P/V ratio
• Determination of the percentage of net profit
with the help of margin of safety ratio = (P/V
ratio * MS ratio)

32. Cash Break-Even Point
• is total cash
fixed cost
divided by
contribution
margin per unit.

33. Graphic presentation of the cash
break-even sales revenue(CBESR)

34. • Graphically, the CBEP is determined at the
point of intersection of total cash cost line and
total sales line. The area to the left of the
curve signifies cash losses and the area on the
right side is indicative of cash profits.

35. Thank You