7/27/2019 Break Even Analysis gjfgkdflgkldfkgkldfklgkldfklgkllgkldlfgjlkdflgjkldfklgkldfglkdfjlkgjkldjgkljdflgkldfjgkljdfkljglkfjklgjklfdjgjdfkljgkldfjklgjfkldjgkjdfklgjkldfklgjkldjgkljdfkljgkldfjklj

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BREAK EVEN ANALYSIS

Books Referred :

Managerial Economics By P.N.ChopraBy Dr. Raj Kumar

Prof. Kuldip Gupta

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Break Even Analysis

It studies the relationship between the volumeand cost of production on the one hand, and the

revenue and profits obtained from the sales onthe other.

According to Martz, Curry and Frank, ABreak-Evan Analysis indicates at what level cost and

revenue are in equilibrium.

In break even analysis, the role of break evenpoint is of particular importance.

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The Break-Even Point is the point at whichtotal revenue and total costs are equal.

It is the point of zero profit.

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Assumptions of Break-Even analysis

It assumes that costs can be classified into fixedand variable costs. It ignores semi-variablecosts.

Total Revenue is assumed to be variable withthe physical volume of production.

The price of the product is assumed to beconstant.

It assumes constant technology and noimprovement in labour efficieny as ouptut risesor falls.

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The Break-Even Chart

A Break Even Chart may be defined as ananalysis in graphic form of the relationship

of production and sales to profits.

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Alternatives to explain Break-Even Analysis

Break Even Point in units

QB = TFC (P-AVC)

Break Even Point in Sales

SB = TFC1-TVC

TR

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3. Break Even Point in Percentage

In order to determine the break evenpoint in terms in percentage utilisation ofplant capacity (%B) the equation :

%B= TFC (P-AVC)*Q(Cap)

Cap = capacity

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Methods of break even Analysis

Graphic method

Break Even Chart can be used to explainthe break even point under GraphicMethod.

The Break Even Chart shows the extent of

profit or loss to the firm at different levelsof activity.

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2. Contribution Margin Method

In the short run, where many of the firms costs arefixed, businessmen are often interested in determiningthe contribution additional sales make towards fixed

costs and profits. Contribution analysis provides this information.

Contribution profit analysis provides a useful format forexamining a variety of price and output decisions.

Total Contribution Profit (TCP) = Total Revenue (TR)Total Variable Cost (TVC)

= Total Net Profit (TNP) + Total Fixed Cost (TFC)

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3. Algebraic Method

Break Even Analysis can also beperformed algebraically, as follows.

TR = (P).(Q)

TC=TFC+TVC

TC=TFC+(AVC).(Q)

Substituting Q with QB (Break EvenOutput), we have TR=TC

(P).(QB )

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Advantages of Break Even Analysis

Simple to operate and easy to understand

Helps the management in production planning

Facilitates calculation of important factors like

Break Even Point Valuable aid to management for decision-making

Facilitates study of relative profitability

Helps in Cost control

Profit Planning

Management reporting (MBE i.eManagement by Exception)

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