A slide show explaining the concept of break even point.

1. UNIT – III
F.Y BBA SEMESTER-I
MANAGERIAL ECONOMICS
BREAK EVEN ANALYSIS

2. Break-even Analysis Definition:
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3. • Break even analysis (BEA) is an important technique to trace the relation ship
between costs, revenue, and profits at the varying level of output or sales.
• BEA tells how many units must be sold to cover the fixed cost and variable
cost of production.
• The BEA is considered a measure of the safety margin.
• The Break even point is located at that level of output or sales at which the
net income or profit is zero.
•At this point total cost is equals to total revenue, hence the break even point is
the no-profit-no-loss zone.

4. Assumption of Break- Even Analysis
• The cost function and revenue functions are linear.
•The total cost is divided into fixed cost and variable cost.
• The selling price is constant.
• The Volume of Sales and the volume of production are
identical.
• Average and marginal productivity of factors are constant.
• The product mix is stable in the case of multi-product firm.
• Factor price is constant.

6. Formula for determining BEP
1. BEP in Terms of Physical Units
2. BEP in Terms of Sales value
When a firm is a multi-product firm the BEP is to be measured in terms of
sales value
Where,
TFC = total fixed cost
P = selling price
AVC = Average variable cost
TR = total Revenue

7. Ex-1 A firm incurs fixed cost of Rs. 480, variable cost per unit Rs. 10 and sells
product at Rs. 50 per unit. Find the break-even point.
Ans. TFC = Rs. 480
Avc = Rs 10
P = Rs 50
Interpretation:- Break Even Point is reached when 12units are produced and sold.
When 12 units are produced TC = 480 + (10*12) = Rs 600 and TR = 12*50 = Rs 600.
Thus TR = TC, So no profit no loss.
Ex-2 A firm incurs fixed cost of Rs. 4000 and variable cost of Rs 10,000 and its total
sales receipts are Rs. 15000. determine the break-even point.
Ans. TFC = Rs. 4000 TVC = Rs. 10,000 TR = Rs. 15000 CR = 1/3
Interpretation:- the break even point is reached when the firm sales value is Rs. 12000.
At Rs. 12000 sales value there is no profit no loss

8. LIMITATION OF BEA
• It is Static – In BEA everything is assumed to be constant. This implies a static
condition . It is not suited to a dynamic situation.
• It is Unrealistic – It is based on many assumption which do not hold good in practice.
Linearity of cost and revenue are true only for limited range of output.
• It has many shortcomings – The BEA regards profit as a function of output only. It
fails to considered the impact of technological change, better management, division of
labour, improved productivity, and other factors influencing profits.
• Its scope is limited to the short run only. It is not effective in a long run.
• It assumes horizontal demand curve with the given price of the product. But this is
not so in the case of monopoly.
• It is difficult to handle selling costs in the BEA. Selling cost do no vary with output.
They manipulate sales and affect the volume of output.
• The traditional BEA is very simple. It makes no provision for corporate income tax.

9. • USEFULNES OF BEA
• It provides a microscopic view of the profit structure of the firm.
• Empirical cost functions required in BEA is of great help for cost control in business.
• It provides a flexible set of projections of costs and revenue under expected future
conditions can serve the purpose of profit prediction and becomes a tool for profit
making.
• The BEA can be used for determining the safety margins regarding the extent to which
the firm can permit a decline in sales without making any losses.
•The BEA is useful in determining the target profit sales volume.
•It is highly significant in decision making pertaining to pricing policy, sales
projection, capital budgeting, etc.

12. Example for practice.
Ex-1 A firm incurs fixed expenses amounting to Rs. 12000. Its variable cost is RS. 5 per
unit and selling price is Rs. 8 per unit. Determine its break even point and safety margin
for the sales of 5000 units.
Ex-2 A firm starts a business with fixed expenses of Rs. 60,000 to produce commodity
X. Its variable cost is Rs. 2 per unit and prevailing market price of a product is Rs. 6.
How much the firm should produce to earn a profit of Rs 20,000 at this price.

13. References
1. Managerial Economics by D.M
Mithani
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