break even analysis slides

7/29/2019 Break Even Analysis Slides

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BREAK EVEN ANALYSISBEA Enables the Management to ascertainthe movement of profit with changesin the volume of sales


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BEPIt is the level of output where the TR equal toTC

Cost Revenue

Profit Profit

TR

TC

X

Y

MO

Loss

Output


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FORMULA TO FIND OUT BEPBEP = TFC P AVCTFC = TOTAL FIXED COSTP = PRICE PER UNITAVC = AVERAGE VARIABLE COSTP AVC SHOWS CONTRIBUTORY MARGIN [CM] THEEQUATION CAN BE WRITTEN AS

BEP = TFCCM


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Eg:1. TFC Rs. 2000 Price= Rs. 30 AVC = Rs. 10BEP = 2000 = 100 units30-10

2. TFC = 20,000 rice = 50 AVC = 25BEP = 20,000 = 100 x 20,00050 percent 50

= Rs. 40,000


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APLLICATION OF BREAK-EVEN ANALYSIS INDECISION MARKING

1. PRICE QUALITY DECISION2. SELECTION OF SUITABLE TECHNOLOGY3. TO ACHIEVE TARGETTED PROFIT4. MAKE OR BUY DECISIONS5. TO DECIDE PROMOTIONAL EXPENDITURE


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PRICE QUALITY DECISIONAt Sales Volumeox1-A is BEPOx2-BOx3-COx4-D

Price

TR1

TR

TC

TC1

Y

X0

Quantit

x4 x3 x2 x1

D

C B

A


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SELECTION OF SUITABLE TECHNOLOGYPlant 1 Plant 2 Plant 3

Price [Rs] 8 8 8FC [Rs] 80,000 1,80,000 2,80,000AVC [Rs] 4 2 1


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Sales levelunits Plant 1Profit/Loss [Rs.] Plant 2Profit/Loss [Rs.] Plant 3Profit/Loss [Rs.]0,000 - 40,000 - 120,000 - 2,10,0000,000 BEP - 60,000 - 1,40,0000,000 40,000 BEP - 70,0000,000 80,000 60,000 BEP0,000 1,20,000 1,20,000 70,0000,000 1,60,000 1,80,000 1,40,0000,000 2,00,000 2,40,000 2,10,0000,000 2,40,000 3,00,000 2,80,0000,000 2,80,000 3,60,000 3,50,000

,00,000 3,20,000 4,20,000 4,20,000,10,000 3,60,000 4,80,000 4,90,000Plant 1 Is profitable upto output of 50,000 unitslant 2 Is profitable upto output of 1,00,000 unitslant 3 Is profitable BEYOND 1,00,000 units


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TO ACHIEVE TARGETTED PROFITBEA helps to plan the production and sales to achieve thetargeted profit.Sales Volume = TFC + Targeted ProfitP AVCEg:A company wanted to make the profit of Rs. 7,50,000.Its FC per year is Rs. 7,50,000. Price = 85 VC = 10Sales Volume 7,50,000 + 7,50,000 = 15,00,000

85

10 75= 20,000 units [Rs. 17,00,000]


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To take, make or buy decisionEg:A firm use to buy the part of a product for Rs. 24.The annual demand is 6000 units.If the product is manufactured within the factory,theFC = Rs. 1,00,000VC = Rs 4Whether the decision is rationalBEP = FC = 1,00,000 = 5000units P VC 24 - 4Inhouse production is better than purchase fromoutside.


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Deciding Promotional ExpenditureEg:A firm manufactures toys and sells it for Rs. 60 perunit. The annual sale is 5,500 units. The fixed costper year is Rs. 2,00,000 and variable cost is Rs 20.It wanted to know whether it can spend Rs. 40,000 onpromotional activity?BEP = 2,00,000 = 2,00,000 = 5,000 units60 20 40= 2,00,000 + 40,000 = 2,40,000 = 6,000 units60 20 40It cannot spend Rs 40,000 because total sales islimited to 5,500 units.


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The case of Multi-Product FirmEg:A multi-product firm produces three products x,y andz. The details Price, VC and share of each in GrossRevenue is as follows:

Gross Sales Volume = Rs. 1,50,000

Annual Fixed Cost = Rs. 23,000Question:u Find out BEPu Find out Profit / loss at 80% capacity utilisation

Product Price VC Share in GR

X 4 3 20Y 5 4 40Z 8 6 40


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Product Price VC Share Share of VC% FC +

X 4 3 20 75 25

Y 5 4 40 80 20

Z 8 6 40 75 25

Share in GR Share to FC +X 20 25 % of 20% 5 %Y 40 20 % of 40% 8 %Z 40 25 % of 40 % 10 %

Share to FC + Profit 23 %


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BEP = FC or FCS VC CM= 23000 = 23000 * 100 Rs 1,00,00023/100 23At 80% capacity GR = 1,20,000BEP = FC + VC, 23,000 + 77% [1,20,000]23,000 + 92,400 = 1,15,400BEP = 1,15,400Profit = 1,20,000 1,15,400 = 4,600


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THANK YOU

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