BREAK EVEN ANALYSIS

BACHELAR OF COM-MERCE

BANKING AND INSUR-ANCE

SEMISTER- 3ACADEMIC YEAR- 2013-

14

PRESENTED BY GROUP 2

MANAGEMENT ACCOUNT-ING

Group Members

NAMES

Mansi

Trushna desai

Aswini gije

Maheshwari gummapu

Gauri

Anuradha joshi

Kunal kadam

Roll no's

208

209

210

211

212

213

214

Introduction

Break even calculator

Uses of break even analysis

Formula

Key terminology

Margin of safety

Example

Target profit

Limitation

Absorption v/s marginal costing

CONTENTS

As an entrepreneur, what you want to know

• How many goods do we have to sell before we start making money

If we sell 1,00,000 units. what will our profit be? What will be more profitable? make or buy?

The answer to all of these is…..

Breakeven Analysis: A decision making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.

Introduction

A breakeven analysis is used to determine how much

sales volume your business needs to start making a

profit.

The break even analy-sis is especially useful when you

are developing a pric-ing strategy, either as part of a

marketing plan or a business plan.

Break even analysis

• It is a planning and control technique.

1)Planning: Make informed decisions.

2)Control: Constant Checks.

Cost

• Fixed (Indirect/Overheads) – are not influenced by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (salaries), some types of energy costs, equipment and machinery, buildings, advertising and promotion costs

• Variable (Direct) – vary directly with the amount pro-duced, e.g., raw material costs, some direct labour costs, some direct energy costs

• Semi-fixed – where costs not directly attributable to either of the above, for example, some types of energy and labour costs

Uses of Breakeven Analysis

• C-V-P analysis is an important tool in terms of short-term planning and decision making

• It looks at the relationship between costs, revenue, output levels and profit

• Short run decisions where C-V-P is used in-clude

choice of sales mix, pricing policy etc.

Break-even Analysis

• The break-even point can be found using the fol-lowing

equation:

B.P = Fixed cost contribution margin

= Fixed cost selling price/unit

Key terminology: Break even analysis

• Break even point :-

• Contribution per unit :-

• Margin of safety :-

• Margin of cost :-

Margin of Safety

• The difference between budgeted or actual sales and the breakeven point

• The margin of safety may be expressed in units or revenue terms

• Shows the amount by which sales can drop before a loss will be incurred

Formula:- MOS(Rs) = Actual sales –BEP sales Mos(units) = Mos sales selling price per unit

Example 1

Using the following data, calculate thebreakeven point and margin of safety in units: Selling Price Per unit = 50 Variable Cost Per unit = 40 Fixed Cost = Rs 70,000 Budgeted Sales = 7,500 units

Example 1: Solution

Contribution per unit = selling price per unit – vari-able cost per unit

= 50 – 40 = 10 per unit Breakeven point = Fixed cost contribution per unit = 70,000 10 = 7000 Margin of safety = Actual sales (units) -

BEP( units ) = 7,500 – 7000 = 500 units

• Margin of safety = 7500 – 7000 = 500 units

Target Profits

• What if a firm doesn’t just want to breakeven – it requires a target profit

• Contribution per unit will need to cover profit as well as fixed costs

• Required profit is treated as an addition to Fixed Costs

Example 2

Using the following data, calculate the level ofsales required to generate a profit of €10,000:• Selling Price per unit = 35• Variable Cost per unit = 20• Fixed Costs = Rs 50,000

Example 2: Solution

• Contribution = Contribution per unit = selling price per unit – variable cost per unit

= 35 – 20 = €15• Level of sales required to generate profit of

Rs10,000:

Required sales = Target profit + Fixed cost contribution per unit = 10,000 + 50,000 = 4000 15

Limitations of B/E analysis

• Costs are either fixed or variable• Fixed and variable costs are clearly discern-

able over the whole range of output• Production = Sales• One product/constant sales mix• Selling price remains constant• Efficiency remains unchanged• Volume is the only factor affecting costs

Absorption

Fixed costs included in Product Cost

FC not treated as period cost – closing/opening stock values

Under/over absorption of costs

Complies with Financial Accounting standards

Marginal

Fixed costs not included in Product Cost

FC treated as period cost

No under/over absorp-tion of costs

Does not comply with Finan-cial Accounting standards

Absorption and Marginal Costing Compared