Break Even Analysis:

Break-even analysis is a technique widely used by production and

management and management accountants. It is based on
categorizing production costs between those which are variable
(costs that change when the production output changes) and those
that are fixed (costs not directly related to the volume of
production). Total variable and fixed costs are compared with sales
revenue in order to determine the level of sales volume, sales value
or production at which the business makes a neither a profit nor a
loss (the break-even-point).

Definition:
A calculation of the sales volume (in units) required to just cover
costs. A lower sales volume would be unprofitable and a higher
volume would be profitable. Break even analysis focuses on the
relationship between fixed cost, variable cost (or cost per units), and
selling price (or selling price per unit).
 The Break Even Chart:
In its simplest form, the break even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in
activity. The point at which neither profit nor loss is made is known as the break-even point and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represent the variation of income at varying
levels of production activity (output). OB represent the total fixed costs in the
business. As output increases, variable costs are incurred, meaning that total costs
(fixes + variable) also increase. At low levels of output, costs are greater than
income. At point of intersection P, costs are exactly equal to income, and hence
neither profit nor loss is made.
Definition of fixed costs
Costs that do not change when production or sales levels do change, such as rent, property tax, insurance, or interest expenses. The fixed costs are summarized for a specific time period (generally one month).
Explanation of fixed costs with example:
Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output the level of fixed output the level of fixed
costs will remain broadly the same. In the long term fixed costs can alter perhaps as a result of investment in production capacity (e.g. adding new factory unit) or through the growth in overheads required to
support a larger, more complex business.

Example of Fixed cost:

Rent and taxes
Depreciation
Research and development
Marketing (non- revenue related )
Administration costs
Assumption Of Break Even Analysis:
The Break even Analysis Depends On three Key Assumption:

Average per-unit sales prices (per-unit revenue):

This is the price that you receive per unit of sales. Take into account sales discount and special offers. Get this numbers from
sales forecast. For non-unit based businesses, make the per- unit revenue Rs. 1 and enter your costs as a percent of a rupees.
The most common questions about this inputs relate to averaging many different products into a single estimates. The analysis
requires a single number and if you build your sales forecast first, then you will have this number. You are not alone in this the
vast majority of businesses sell more than one item, and have to average for their Break even Analysis.

Average Per-unit Cost:

This is incremental cost, or variable cost, of each unit sales. If you buy goods for resale, this is what you paid, on average, for
the goods you sell. If you sell a services, this is what it costs you, per dollar of revenue or unit of services delivered, to deliver
that services. If you are using a units-based Sales Forecast table (for manufacturing and mixed business types), you can
projects unit costs from the sales forecast table. If you are using the basic sales Forecast table for retail, services and
distribution businesses, use a percentage estimate, e.g. a retail store running a 50% margin would have a per-unit cost of .5,
and a per-unit revenue of 1.
 Limitation OF Break Even Analysis:
It is best suited to the analysis of one product at a time. It may be difficult to classify a cost as
all variable or all fixed; and there may be a tendency to continue to use a break even analysis
the cost income function have changed.
It is important to understand what the result of your Break even analysis are telling you.
If, for example, the calculation reports that you would break even when you sold your 500 th
unit, decide whether this seems feasible. If you dont think you can sell 500 units within a
reasonable period of time (dedicated by your financial situation, patience and personal
expectations), then this may not be the right business for you to go into. If you think 500 unit
is possible but would take while, try lowering your price and calculated and analyzing the new
breakeven point.
Alternatively, take a look at your costs both fixed and variable and identify areas where
you might be able to make cuts.
Lastly, understand that breakeven analysis is not a predictor of demand, so if you go into
market with the wrong product or the wrong price, it may be tough to ever hit the break even
point.

 Break even point:
The sales volume (express as units sold) at which the company breaks even. Profits are
Rs.0 at the break even point. The break even point is calculated by the following
formula:
Break Even Point (BEP) = Fixed cost / contribution (selling price- variable
cost)
Time period:
The fixed costs are summarized for a specific time period.
The per unit variable cost is not dependent on a specific period of time.
The per unit selling price is not dependent on a specific period of time.
The Break even Point is expressed the number of units, over a specific time period,
that must be sold to obtain a Net Profit Rs.0. the time period the units must be sold is
always the same as the time period of fixed costs.
Typically the period is monthly, however it could be Yearly or even Hourly. For example,
a farmer seeking the break even on an annual corn crop would choose a yearly time
period. The farmer would add up the fixed costs for the whole year and the break even
sales volume would be expressed as yearly sales volume.
The text that is written in the time period field is copied to the title of the break even
Graph and Break Even Report. If you leave the field blank then nothing will be copied.

BREAK EVEN POINT:

Assume the following:
Fixed Cost:
Monthly Rent: 100Rs.
Insurance (600Rs. P.A. 600/12 months) 50Rs.
Total Monthly Fixed Costs 150Rs.
Variable Cost:
Materials 3Rs.
Labor 6Rs.
Total Variable Cost 7Rs.
Selling price: 10Rs.
Break Even Point Calculation
Break Even Point = Fixed costs / (selling price Variable Costs)
= 150 / (10 7)
= 150 / 3
Break Even Point = 50
To break even the company must sell 50 units per month.
If the company just broke even, then its Profits and Loss statements would look like the followings :
 Monthly Profits and Loss Statements

Sales
Goss sales (10Rs. Per units 50 units) 500Rs.
Les COGS (7Rs. Per Units Units) 350Rs.
Nets Sales 150Rs.
Expenses
Rent 100Rs.
Insurance 50RS.
Total Expenses 150Rs.
Net Profit 0 RS.
 Definition Of Break Even Point:
Break-even point is the level of sales at which profit is zero. According to this definition, at break-
even point sales are equal to fixed cost plus variable cost. This concepts is further explained by
the following equation:
[Break-even sales= fixed cost + variable cost]

The break-even point can be calculated using either the equation method or margin method.
These two method are equivalent:

Equation method:
The equation method center on the contribution approach to the income statement.
The format of this statement can be expressed is equation form as follow:
Profit = (Sales Variable expenses) Fixed Expenses

Rearranging this equation slightly yields the following equation, which is widely used in cost
volume profit (CVP) analysis:
Sales = Variable expenses + Fixed Expenses + Profit

According to the definition of break-even point, break-even point is the level of sales where profits
are zero. Therefore the break-even point can be computed by finding that point where sales just
equal the total of the variable expenses plus fixed expenses and profit is zero.