BREAK-EVEN ANALYSIS

BEA - Meaning

• A break even analysis indicates that at what level of output, cost and revenue are in equilibrium

Martz, Curry and Frank• significance of having greater

productive capacity to lower costs and maximize profits or contribution

Assumptions-BEA

• Two categories of cost - TC & VC• Linear relationship between TC & output• Price remains constant at different levels

of sale• Prices of input factors constant• Cost is related with Output level• Production & Sales are synchronised• Product-mix should be stable for multi-

product firms

Break-Even Graph

Terminology

• BEP– graph showing variation in TC at different

levels of output as well variation in TR

• BEC– Sales revenue = Cost

• Angle of Incidence– Point which the total revenue line intersects

the total cost line

Termin…

• Margin of Safety–Margin of safety = Budgeted sales –

Sales at BEP–Margin of safety expressed as:

• Ratio of budgeted sales to sales at BEP• Ratio of actual sales to sales at BEP• Percentage of budget to BEP• Percentage of actual sales at BEP• Percentage of difference between actual

sales and break even sales to budgeted sales

Termin…

• Margin …–Measures for unsatisfactory margin of

safety• Increase in the sale price• Reduction in fixed costs• Reduction in variable costs• Increase in output• Stop production of non-profitable items

Termin…

• Profit-Volume Ratio– Contribution of sales – Determine most profitable selling area, line

of product/method of distribution– To determine the real position of

profitability

• Uses– Determination of BEP– Identify the profit– Identify the sales volume

Break Even Chart

• Graphical representation of sales & costs at different levels of output

• Study the relationship of output & sales to profit

BEC- Uses

• Profit & expenditure analysis• Cost-Volume-Price relationship• Determination of BEP• Sales on cost of production and profits• P-V ratio & margin of safety • Comparison of budget with actual sales

& profit as variations in revenue/costs• Determining optimum level of output

Limitations -Break Even Analysis

• Omission of other factors • Fixed proportion of FC & VC with

different levels of output• Assumptions of producer’s market

phenomenon• Shift in product-mix

Advantages - BEA

• Forecasting• Decision making• Determination of sales & cost of

production• Policy making

Application - BEA

• Determination of profits at different levels of profit

• To find the level of output• Determination of margin of safety• Effect of price reduction on sales

volume