break even analysis jk

7/30/2019 break even analysis jK

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Break-Even Analysis

PRESENTED BY

J.K.Nanda

Deepak Singh

Sadhana Kamble

Pradeep Ramkyarani

Tiken Singh


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INTRODUCTION

A breakeven analysis is used todetermine how much sales volume

your business needs to start making a

profit.

The breakeven analysis is especially

useful when you're developing a

pricing strategy, either as part of amarketing plan or a business plan.


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BREAK EVEN CALCULATER

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.


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Variable Unit Cost:Costs that vary directly with the productionof one additional unit.

Expected Unit Sales:Number of units of the product projected tobe sold over a specific period of time.

Unit Price:The amount of money charged to thecustomer for each unit of a product or

service.


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Total Variable Cost:The product of expected unit sales

and variable unit cost.(Expected Unit Sales * VariableUnit Cost )

Total Cost:The sum of the fixed cost and total

variable cost for any given level ofproduction.

(Fixed Cost + Total Variable Cost )


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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)


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BREAK EVENPOINT:Number of units that must be sold in

order to produce a profit of zero (butwill recover all associated costs).

BreakEven Point (IN UNIT)= FixedCost /S. Price- Variable Unit Cost

Break Even Point (in Rs)=Fixed

Cost/ S. Price-Variable unitCost*Units


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For example, suppose that your fixed costs

for producing 100,000 product were 30,000rs a year.

Your variable costs are 2.20 rs materials,4.00 rs labour, and 0.80 rs overhead, for atotal of 7.00 rs per unit.

If you choose a selling price of 12.00 rs foreach product, then:

30,000 divided by (12.00 - 7.00) equals6000 units.

This is the number of products that have tobe sold at a selling price of 12.00 rs beforeyour business will start to make a profit.


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Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firm

will incur fixed

costs, these do

not depend on

output or sales.

FC

As output is

generated, the

firm will incur

variable costs

these vary

directly with the

amount produced

VCThe total coststherefore

(assuming

accurate

forecasts!) is the

sum of FC+VC

TC Total revenue isdetermined by theprice charged and

the quantity sold

again this will be

determined by

expected forecast

sales initially.

TR The lower theprice, the less

steep the total

revenue curve.

TR

Q1

The Break-even point

occurs where totalrevenue equals total

coststhe firm, in

this example would

have to sell Q1 to

generate sufficient

revenue to cover its

costs.


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR (p = 2)

Q1

If the firm

chose to set

price higher

than 2 (say3) the TR

curve would

be steeper

they would

not have tosell as many

units to

break even

TR (p = 3)

Q2


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR (p = 2)

Q1

If the firmchose to set

prices lower

(say 1) it

would need

to sell moreunits before

covering its

costs

TR (p = 1)

Q3


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTC

TR (p = 2)

Q1

Loss

Profit


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTC

TR (p = 2)

Q1 Q2

Assume

current sales

at Q2

Margin of Safety

Margin of

safety shows

how far sales

can fall before

losses made. If

Q1 = 1000 and

Q2 = 1800, sales

could fall by 800

units before aloss would be

made

TR (p = 3)

Q3

A higher price

would lower

the break

even point

and the

margin of

safety wouldwiden


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USES OF BREAK EVEVN POINT

Helpful in deciding the minimum quantity ofsales

Helpful in the determination of tender price

Helpful in examining effects uponorganizations profitability

Helpful in deciding about the substitution of

new plants

Helpful in sales price and quantity

Helpful in determining marginal cost


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LIMITATIONS

Break-even analysis is only a supply side (costsonly) analysis, as it tells you nothing about whatsales are actually likely to be for the product atthese various prices.

It assumes that fixed costs (FC) are constant

It assumes average variable costs are constantper unit of output, at least in the range of likelyquantities of sales.

It assumes that the quantity of goods produced isequal to the quantity of goods sold (i.e., there is nochange in the quantity of goods held in inventoryat the beginning of the period and the quantity ofgoods held in inventory at the end of the period.

In multi-product companies, it assumes that therelative proportions of each product sold andproduced are constant.


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CONCLUSION

Break even analysis should be distinguished from two other

managerial tools :-

Flexible budgets and standard cost the variable expense budget

is built on the same basic cost output relationship, but it is

confined to costs and is primarily can concerned with the

components of combined cost since the purpose is to control

cost by developing expenses standards that are flexibly to

achieving rate this purpose often leads to measures of

achieving that differ among costs and operation so that they

cant be readily added or translated in to an index of output

for the enterprise as a whole standard costs on the otherhand on.

break even analysis jk

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