break even analysis 1 3rd group final

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Break-Even Analysis

PRESENTED BY

J.K.Nanda

Deepak Singh

Sadhana Kamble

Pradeep Ramrakhyani

Tiken Singh

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INDEX

1. Introduction

2. Break Even Calculator

3. Variable Cost /Fixed Cost & Total Cost

4. Methods of Break Even Analysis

5. Mathematical Explaination

6. Graphical Presentation

7. Advantages & Dis-advantages of BE8. Limitation of Break Even Point

9. Final points

10. Videos on BE

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A breakeven analysis is used to determine 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 a marketing plan or a business plan.

A break-even point defines when an investment will generate a positive

return. Fixed costs are not directly related to the level of production.

Variable costs change in direct relation to volume of output.

Total fixed costs do not change as the level of production increases.

INTRODUCTION

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Break Even Calculater

Break-even analysis is a useful tool to study the relationship between fixedcosts, variable costs and returns. A break-even point defines when aninvestment will generate a positive return and can be determinedgraphically or with simple mathematics. Break-even analysis computes thevolume of production at a given price necessary to cover all costs.

Break-even price analysis computes the price necessary at a given level ofproduction to cover all costs. To explain how break-even analysis works, it isnecessary to define the cost items.

Fixed Cost:

The sum of all costs required to produce the first unit of a product. Thisamount does not vary as production increases or decreases, until newcapital expenditures are needed.

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Variable Unit Cost:

Costs that vary directly with the production of one additional unit. costschange in direct relation to volume of output. They may include cost ofgoods sold or production expenses such as labor and power costs, feed,fuel, veterinary, irrigation and other expenses directly related to theproduction of a commodity or investment in a capital asset. Total variable

costs (TVC) are the sum of the variable costs for the specified level ofproduction or output. Average variable costs are the variable costs perunit of output or of TVC divided by units of output.

Expected Unit Sales:Number of units of the product projected to be sold over a specific period of

time.

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

service.

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Break Even Calculater


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Total Variable Cost:The product of expected unit sales and variable unit cost.(Expected Unit Sales * Variable Unit Cost )

Total Cost:The sum of the fixed cost and total variable cost for any givenlevel of production.(Fixed Cost + Total Variable Cost )

Total Revenue:The product of expected unit sales and unit price.(Expected Unit Sales * Unit Price

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Profit (or Loss):The monetary gain (or loss) resulting from revenuesafter subtracting all associated costs. (Total Revenue -Total Costs)

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Break-Even Analysis


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BREAK EVEN POINT:Number of units that must be sold in order to produce a profit

of zero (but will recover all associated costs).

Break Even Point (IN UNIT)= Fixed Cost /S. Price- Variable UnitCost

Break Even Point (in Rs)=Fixed Cost/ S. Price-Variable unitCost*Units

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Break-Even Analysis


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Methods of break even point a) Graphic Methodb) Mathematical Calculation

The graphic method of analysis helps the reader understand the concept of thebreak-even point. However, graphing the cost and income lines is laborious.The break-even point is found faster and more accurately with the followingformula:

B-E = F / (S - V)where:

B-E = break-even point (units of production),F = total fixed costs,V = variable costs per unit of production,S = savings or additional returns per unit of production,

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For example, suppose that your fixed costs for producing 100,000product were Rs. 30,000 a year.

Your variable costs are Rs. 2.20 materials, Rs.4.00 labour, and Rs.0.80 overhead, for a total of Rs. 7.00 per unit.

If you choose a selling price of Rs. 12.00 for each product, then:

30,000 divided by (12.00 - 7.00) equals 6000 units.

This is the number of products that have to be sold at a selling priceof Rs. 12.00 before your business will start to make a profit.

Example -1

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A farmer wants to buy a new combine rather than hire a custom harvester.The total fixed costs for the desired combine are Rs.21,270 per year. Thevariable costs (not counting the operator's labor) are Rs.8.75 per hour. The

farmer can harvest 5 acres per hour. The custom harvester chargesRs.16.00 per acre. How many acres must be harvested per year to break-even?

Fixed costs (F) = Rs21,270

Savings (S) = Rs.16/AVariable costs (V) = Rs 8.75/hr / 5 A/hr = Rs.1.75/AB-E = Rs.21,270 / (Rs.16/A Rs. 1.75/A) = Rs.21,270 /Rs.14.25/A = 1,493 Acres

Example -2

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Break-Even Analysis

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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 = Rs.2)

Q1

If the firm

chose to set

price higher

than Rs 2(say Rs 3)

the TR curve

would be

steeper

they wouldnot have to

sell as many

units to

break even

TR (p = Rs.3)

Q2

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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR (p = Rs.2)

Q1

If the firmchose to set

prices lower

(say Rs1) it

would need

to sell moreunits before

covering its

costs

TR (p = Rs.1)

Q3

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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTC

TR (p = RS.2)

Q1

Loss

Profit

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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTC

TR (p = Rs.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 = Rs.3)

Q3

A higher price

would lower

the break

even point

and the

margin of

safety wouldwiden

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Margin of safety in units. Draw a dotted line coming from the break evenpoint to meet the x axis. The area from where the line touches the x axis to theactual sales is the margin of safety in units.

Margin of safety in Rs. / Currency . Draw a dotted line from the break evenpoint to the y axis. The area from where the line touches the y axis to the toptotal revenue line is the margin of safety in Rs. / Currency in Value.

Calculating the margin of safety

The margin of safety is where budgeted sales exceed breakeven level ofsales. To get the margin of safety you subtract breakeven sales from budgetedor actual sales.

Margin Safety

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Break even analysis enables a business organization to:

Measure profit and loses at different levels of production and sales.To predict the effect of changes in price of sales.

To analyse the relationship between fixed cost and variable cost.To predict the effect on profitablilty if changes in cost and efficiency.Helps in deciding the minimum quantity of salesHelps in the determination of tender priceHelps in examining effects upon organizations profitabilityHelpful in deciding about the substitution of new plants

Helpful in sales price and quantityHelpful in determining marginal cost

Even though break even has these advantages or uses, there are also severaldemerits of break even analysis.

Uses Of Break Even Point

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Assumes that sales prices are constant at all levels of output.

Assumes production and sales are the same.

Break even charts may be time consuming to prepare.

It can only apply to a single product or single mix of products.

Disadvantages of Break Even Point

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Break-even analysis is only a supply side (costs only) analysis, as ittells you nothing about what sales are actually likely to be for theproduct at these various prices.

It assumes that fixed costs (FC) are constant

It assumes average variable costs are constant per unit of output, atleast in the range of likely quantities of sales.

It assumes that the quantity of goods produced is equal to the

quantity of goods sold (i.e., there is no change in the quantity ofgoods held in inventory at the beginning of the period and thequantity of goods held in inventory at the end of the period.

In multi-product companies, it assumes that the relative proportionsof each product sold and produced are constant.

Limitations

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The main advantage of break-even analysis is that it points out the relationshipbetween cost, production volume and returns. It can be extended to showhow changes in fixed cost-variable cost relationships, in commodity prices, orin revenues, will affect profit levels and break-even points. Limitations of

break-even analysis include:

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 after the

cost and income functions have changed.Break-even analysis is most useful when used with partial budgeting or capitalbudgeting techniques. The major benefit to using break-even analysis is that itindicates the lowest amount of business activity necessary to prevent losses.

end..

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Real Estate XL Sheet


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BE- VIDEO


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BE Video-2


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THANK YOU

break even analysis 1 3rd group final

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