BREAK EVEN POINT & ANALYSIS : BREAK EVEN POINT & ANALYSIS FROM
UDAY PRATAP SINGH
PRASHANT KUMAR DEFINITION : DEFINITION The break even point is the point where the gains equal the losses. The point defines when an investment will generate a positive return. The point where sales or revenues equal expenses. The point where total costs equal total revenues. There is no profit made or loss incurred at the break even point. It is the lower limit of profit when prices are set and margins are determined. DEFINITION : DEFINITION At this point the income of the business exactly equals its expenditure. If production is enhanced beyond this level, profit shall accrue to the business and if it is decreased from this level, loss shall be suffered by the business. FORMULA : FORMULA Break even point (of output)
= (fixed cost) / (contribution per unit)
Contribution=selling cost-variable cost
Fixed cost= Contribution- profit FORMULA : FORMULA Break even point of Sales=
1. Fixed price x SP per unit
Contribution per unit
Fixed Cost x Total Sales
Total Contribution CALCULATION OF THE BREAK EVEN POINT : CALCULATION OF THE BREAK EVEN POINT VARIABLE COST-
They are directly related to the volume of sales: that is these cost increase in proportion to the increase in sales and vice versa.
FIXED COST -
Fixed costs continue regardless of how much you can sell or not sell, and can be made up of such expenses as rent, wages, telephone account and insurance. These cost can be estimated by using last years figure as a basis, because they typically do not change.
Formula= FIXED COST
VARIABLE COSTS Slide 8: At break even point, the desired profit is zero. In case the volume of output or sales is to be computed for a desired profit, the amount of desired profit should be added to fixed cost is the formula given above.
Units for a desired profit=
Fixed cost+ desired profit
Contribution per unit Slide 9: Sales for a desired profit=
(Fixed cost + Desired profit)
P/V ratio= Contribution per unit
Selling price per unit
= Total contribution
Total sales CASH BREAK EVEN POINT : CASH BREAK EVEN POINT It is the point where cash breaks even i.e. the volume of sales where cash realization on account of sales will be sufficient to meet the immediate cash liabilities.
The label of activities where the total costs under two alternatives are same
While calculating this point cash fixed costs (i.e. excluding fixed share of depreciation and deferred expenses) and cash contribution (i.e. after making adjustments for variable share of depreciation etc.) are considered. Slide 11: The point helps the management in determining the level of activities below which there are chances of insolvency on account of the firms inability to meet the cash obligation unless alternatives are made. FORMULA FOR CASH BREAK EVEN POINT : FORMULA FOR CASH BREAK EVEN POINT Cash break even point (in units) =
(Cash fixed cost) / (cash contribution per unit)
Cash break even point (in sales Rs.) =
(Cash fixed cost) / (cash contribution per unit) x selling price per unit BREAK EVEN ANALYSIS : BREAK EVEN ANALYSIS It refers to the ascertainment of level of operations where total revenue equals to total costs.
Analytical tool to determine probable level of operation.
Method of studying the relationship among sales, revenue, variable cost, fixed cost to determine the level of operation at which all the costs are equal to the sales revenue and there is no profit and no loss situation.
Important techniques is profit planning and managerial decision making. DEFINATIONS USED IN BREAK EVEN POINT- : DEFINATIONS USED IN BREAK EVEN POINT- Fixed Cost:The sum of all costs required to produce the first unit of a product. This amount does not vary as production increases or decreases, until new capital expenditures are needed.
Variable Unit Cost:Costs that vary directly with the production of one additional unit.
Expected Unit Sales:Number of units of the product projected to be sold over a specific period of time.
Unit Price:The amount of money charged to the customer for each unit of a product or service. DEFINATIONS CONT : DEFINATIONS CONT Total Variable Cost:The product of expected unit sales and variable unit cost. (Expected Unit Sales * Variable Unit Cost )
Total Cost:The sum of the fixed cost and total variable cost for any given level of production. (Fixed Cost + Total Variable Cost )
Total Revenue:The product of expected unit sales and unit price. (Expected Unit Sales * Unit Price )
Profit (or Loss):The monetary gain (or loss) resulting from revenues after subtracting all associated costs. (Total Revenue - Total Costs) DEPENDENCE : DEPENDENCE Break even analysis depends on the following variables:
The fixed production costs for a product.
The variable production costs for a product.
The product's unit price.
The product's expected unit sales [sometimes called projected sales.]
On the surface, break-even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered. Another way to look at it is that the break-even point is the point at which your product stops costing you money to produce and sell, and starts to generate a profit for your company.
It can also use break even analysis to solve managerial problems. ADVANTAGE : ADVANTAGE It is cheap to carry out and it can show the profits/losses at varying levels of output.
It provides a simple picture of a business - a new business will often have to present a break-even analysis to its bank in order to get a loan. LIMITATIONS : 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
It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)
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). THANKS ! : THANKS !