Break-even analysis determines the level of output where costs and revenues are equal. It makes assumptions like constant prices and linear cost relationships. The break-even point is where total revenue equals total cost. The margin of safety is the difference between actual/budgeted sales and break-even sales. The profit-volume ratio measures contribution and is used to determine the most profitable areas. Break-even analysis can be shown graphically and is used for profit and cost analysis, determining the break-even point, and setting production levels.

1. BREAK-EVEN ANALYSIS

2. BEA - MeaningA break even analysis indicates that at what level of output, cost and revenue are in equilibriumMartz, Curry and Franksignificance of having greater productive capacity to lower costs and maximize profits or contribution

3. Assumptions-BEATwo categories of cost - TC & VCLinear relationship between TC & outputPrice remains constant at different levels of salePrices of input factors constantCost is related with Output levelProduction & Sales are synchronisedProduct-mix should be stable for multi-product firms

4. Break-Even Graph

5. Terminology BEPgraph showing variation in TC at different levels of output as well variation in TRBECSales revenue = CostAngle of IncidencePoint which the total revenue line intersects the total cost line

6. Termin…Margin of SafetyMargin of safety = Budgeted sales – Sales at BEPMargin of safety expressed as:Ratio of budgeted sales to sales at BEPRatio of actual sales to sales at BEPPercentage of budget to BEPPercentage of actual sales at BEPPercentage of difference between actual sales and break even sales to budgeted sales

7. Termin…Margin …Measures for unsatisfactory margin of safetyIncrease in the sale priceReduction in fixed costsReduction in variable costsIncrease in outputStop production of non-profitable items

8. Termin…Profit-Volume RatioContribution of sales Determine most profitable selling area, line of product/method of distributionTo determine the real position of profitability UsesDetermination of BEPIdentify the profitIdentify the sales volume

9. Break Even ChartGraphical representation of sales & costs at different levels of outputStudy the relationship of output & sales to profit

10. BEC- UsesProfit & expenditure analysisCost-Volume-Price relationshipDetermination of BEPSales on cost of production and profitsP-V ratio & margin of safety Comparison of budget with actual sales & profit as variations in revenue/costsDetermining optimum level of output

11. Limitations -Break Even AnalysisOmission of other factors Fixed proportion of FC & VC with different levels of outputAssumptions of producer’s market phenomenonShift in product-mix

12. Advantages - BEAForecastingDecision makingDetermination of sales & cost of productionPolicy making

13. Application - BEADetermination of profits at different levels of profitTo find the level of outputDetermination of margin of safetyEffect of price reduction on sales volume