Introduction to

Break Even Analysis

Presented By kuldeep kukrati

Definition
Break even analysis indicates at what level cost and revenue are in equilibrium . Thus , this analysis determines the volume of operation where total revenues equal total costs. This level volume is known as break-even point, no profit no loss point. Or in other words The Break even analysis is that point of sales volume where total revenues and total expenses are equal, it is also said as the point of zero profit or zero loss.

Break Even Chart

Sales at Rs. 20 per unit Volume of Sales 3,000 unit Fixed Costs Rs. 16,500 Variable Costs Rs. 10 per unit The break even point thus occurs at 16,50 units valued at Rs. 33,000. It Can also be worked out with the help of the following formula:BEP = 16500 * 60000 = Rs. 33,000 BEP = F * S 60000 - 30000 S-V

Importance of Break-even Analysis

Setting up flexible budget Profit planning Performance evaluation for control Helpful in price fixation Allocation of overhead costs Analysis of effect of changes in cost

Assumption of Break-even Analysis

The basic assumption of Break even analysis is that all elements of costs (i.e., production, administration, selling and distribution) can be divided in to two parts, i.e., fixed cost and variable cost. It is assumed that variable cost remains constant per unit at all levels of production. In other words, variable cost fluctuates directly in proportion to changes in volume of production.

Fixed cost remains certain and constant at any level of activity from zero production to full capacity.
Selling price per unit remains constant or unchanged at all levels of production, i.e., there is no change in selling price despite increase or decrease in supply or demand of goods. Behaviour of different costs is linear, i.e., a straight line will be drawn if cost data are represented on a graph paper.
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Limitation of Break-even Analysis

Division in fixed and variable costs : It may be difficult to divide all costs into fixed and variable costs. moreover, in many cases cost may not remain either absolutely fixed or absolutely variable in relation to the volume of output. Static Concept : The break-even analysis assumes a static situation that cannot exist for long periods of time. For example , it assumes no changes in general price level, selling price, production technology, efficiency of machines, etc., but in practice there is constant change in these factors as management wants to improve production system and increase efficiency. Maximum and optimum production : This analysis assumes that there should be maximum production for maximum profit but in practice decision of optimum production is required and not that 6 of maximum production

Uses of Break-even Analysis

Calculation of profit at different level of sales.

Determination of sales to earn desired profit.

Estimation of margin of safety. Make or buy decision. Determination of optimum sales-mix. Decision of change in capacity.

Conclusion
Break-even analysis can be very helpful in the evaluation of a new venture. In most instances, success takes time. Many new enterprises and products actually operate at a loss (at a point below break-even) in the early stages of development. Knowing the price or volume necessary to break-even is critical to evaluating the time-frame in which losses are permissible. The break-even is also an excellent benchmark by which a companys short-term goals can be measured/tracked. Break-even analysis mandates that costs be analyzed. It also keeps a focus on the connection between production and marketing.
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