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BREAK EVEN, ANALYSIS, , SYNOPSIS, 1., , Meaning of Break-Even Analysis, , 2., , Break-Even Point, , 3., , Break-Even Chart, , 4., , Effect of changes in price and cost on Break- even Point, , 5., , Formula Method for Determining BEP, , 6., , Contribution Margin Method, , ., , Assumptions of Break-Even Analysis, Uses of Break-Even Analysis, , 8., 9., , Limitations of Break-Even, , Analysis, , 10. Practical Problem, , Summary, 1., , MEANING OF BREAK-EVEN ANALYSIS, Break-even analysis occupies an important place in economic theory. It is a technique, , widely used by production management & management accountants to help plan and, , Control the business operations., Break-even analysis examines the relationship among the total revenue, total costs and, total profits of the firm at various levels of outputs. It is a point where losses cease to occur, l e profit have not yet begun. It is the point of zero profit., , AcCording, 9st, , to, , and revenue, , Martz, Curry, and Frank,, , are, , in, , "a break-even, , analysis indicates, , at, , what level, , equilibrium"., , a, Dominick Salvatore, "Break-even analysis is method, of determining the, from the total revenue and total, uput at which a firm breaks-even or earns a target profit, COst functions, of the firm"., , According, , to, , Break-even technique is adapted to determine the sales needed to attain a specified, to, , product,, applied, of profit. Break-even method can, Unt, re company's operations. Break-even analysis is a simple t0ol that, be, , a, , entire, , will cover both variable, forecast of demand., mpare to the, , dntity of sales that, , antity to, , & fixed costs. Such, , an, , investment, , or, , the, , defines the minimum, , analysis gives, , managers, , a
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Business Economics, , 156, , (F. Y.B.Com.) (Sem., , --1), , economic, , ne, , significance tor, considerable, has, (BEA), break-even analysis, and public, investment analysis, , business decision, , making, , 0, , Paper-), , rese, , polich, , company management,, he BEA is an important technique to trace the relationship between costs, revenue, , and, , profits at the varying levels of output or sales., , In recent years, the break-even charts have been widely used by husiness economics, , COpany, , 2., , executives, investment analysts, government, , agencies, , and, , even trade, , unions,, , BREAK-EVEN POINT, Break-even point (BEP) is the point where total revenue is equal to totalcOst. At breal, , point, the company makes neither profit, even, important to determine the price of a product such, nor, , This point, that the company stillgains net proft, , loss. BEP, , IR-TC, , =, , =, , 0., , Break-even point defines when an investment will generate a positive return. for business, , reaching the break-even point is the first step towards profitabilty., The Break even point is calculated by the following formula:, , Break-even point, , Break, , Even, , =, , Fixed Costs, , Selling Price, , Analysis, , can, , be, , Variable COsts, explained through graphic, , method &, , through algebraic, , method., 3., , BREAK-EVEN CHART, , A break-even chart (BEc) is a group of the short run relation of total cost and of total, revenue to the rate of output and sales., , The BEC graphically shows cost and revenue relation to the volume of output. It thus, depicts profit output relationship. Hence, the BEC is also called profit group., The break-even chart shows the extent of profit or loss to the firm at different level oi, , activity., Linear Break-even Analysis, Linear function implies that the price remains constant and the total revenue and total, cost curves are straight lines. When the price remains the same, every increase in production, and sales will lead to increase in total revenue in a constant proportion. The total revenue, curve starts from the origin indicating that it varies with the level of output. The total cost, , curve is also a straight line starting at a point on the Y-axis above the origin. This indicates, that there is an element of fixed cost in the total cost of production. The point at which total, revenue is equal to total cost is said to be break-even point. The break-even point in the case, , of linear cost and revenue curve can be shown as follow:, TR, , profit||, , TC, E, T R = TC, , Variable cost, TFC, , loss, , Fixedcost, Q, , Output, Fig. 8.1, , X
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Break Even Analysis, , 157, , the diagram, output is measured on X-axis and cost and, revenue on Y-axis., the, revenue, line. TC, sents, total, the total cost line. Fixed cost and, represents, variapie, form the total cost. TFC represents total fixed cost line which is a horizontal straight, line, to X-axis. Here fixed cost is, equal to OF The distance between TC line and TFC line, sents the total variable cost. TR curve indicating that total rever, increases in a, In, , 8.l, , represent, , t, , cost, , paralle, , e p r e, , ant proportion. The total revenue curve and the total cost curve interse each other at, sint 'E' and this point is the break-even point. At this, poin, total revenue is equal to tota, Ost. The firm neither makes profit nor loss at this point.point, Before the break-even, point total, , rpvenue is less than total cost, (TR < TC) and the firm incur loss whereas after the break, noint total revenue is more than the total cost (TR> TC) the firm starts earning profit. even, BreakPven point shows the minimum level of output required to be produced and sold by the, firm, , o break even. Any rational firm would like to produce the quantity of output at the break, even point. No firm would like to produce the output which is less than the break-even, , output as it clearly indicates loss., , Non-Linear Break-even Analysis, While linear total revenue and total, , cost function exists in perfect, in reality, the market structure is Monopoly, Monopolistic competition or Oligopoly. In such a case the, , competition,, , cost and revenue functions are non-linear. The determination of break-even point in this, Case can be, , explained, , with the, , help of diagram, , YA, , TC, 3, , B,, , loss, , TR, , profit, , loss, , TFC, , Q, , Output, Fig. 8.2, , In the diagram 8.2 output is measured on X, , axis and cost and revenue on the Y, , axIs.TR represents the total revenue curve. TC represents the total cost curve. TFC represent, , total fixed cost line, which is a horizontal straight line parallel to X-axis. TFC is equal to OF., 'Curve starts from the origin because at 0 (zero) output, revenue will also be zero (0). TC, Curve starts from above the origin because even at 0 (zero) outputs, firm bears some fixed, , cOsts. The two point 'B' and 'B1' in the diagram indicate the break even points. These are the, pOint of intersection of TR-TC. It indicates that at this point total revenue is exactly equal to, otal cost. To the left of 'B & right of 'B1' i.e. it indicates TC> TR the loss zone. In between, , the points 'B' and 'B1', TR> TC and it indicates of the profit zone of a firm. It is clear that the, im will incur losses if it produces less than OQ1 or more than OQ2 level of output. It will, K e profit only if its level of output lies within Q1 & Q2., , he Break even point graphs helps the business owner determine the level of production, a t will create profits for every level of sales. The business owner then works to increase, profit without investing extra funds.
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Busess comomks (Y,Co.) (50om),, , 4., , ) (Pauy, , EFFECT OF CHANGES IN PRICE AND COST ON BREAK EVEN POINT, , Price and Cost iniluencing the Break-Even Point this is shuwn in the diagram below:, 1., , Changes in Price, Any change in price wil shift the total revenue upward or downward and hence wil, , atfect the break-even point., , TR, Y, , TR, , TR2, TC, , 3, , B2, B, , B, TFC, F, , Q1, , Q2, , Q, , Output, , X, , Fig.:8.3, , The effect of changes in price on the break-even point is shovwn in the fig, 8.3. When, the price increases, the total revenue curve (TR) will shift upward to TR1. This will reduce the, break-even point to By and the level of output falls to Q1., , On the other hand, when the price decreases, the total revenue curve (TR) will shift, downward to TR2. This will increase the break-even point to B2 and the level of output also, increase to Q2., llustration:, If price increase to R10, variable cost = R 6 and fixed cost = 7 50,000. Then the break, even quantity is:, , BEQ, , FC, , P-VC, , 50,000, 10-6, , 50,000, 8-6, , =, , 12,500 units, , On the other hand, if price decreases to R 8, fixed and variable cost remaining the same, then the break-even quantity is, , BEQ=, , =50,00050,00025,000, units, 8-6, 2, , An increase in price will decrease the BEQ and decrease in price will increase the BEQ., Fixed and variable cost remaining the same., , 2., , Changes in Fixed cost, , shift the total cost, itself and hence will affect the break-even point., , Any change in the fixed, , cost will, , upward, , or, , downward, , parallel, , to
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eakEven Analysis, , 159, , TR, , TC, , B, , TC, , TC2, , B, , B,, , F, , TFC, TFC, , TFC2, O, , Q2 Q Q1, , Output, , Fig: 8.4, , The effect of changes in fixed cost on the, break-even point is shown in the fig. 8.4., When the fixed cost (TFC) increases to TFC1, the total cost curve, (TC) will shift upward, to TC1. This will increase the break-even, to, point B1 and the level of output increase to, On the other, , hand, when the fixed cost (TFC) decreases to TFC2, the total cost curve, will shift downward to TC2. This will reduce the break-even, point to B2 and the level of, output also reduce to Q2., , llustration:, Iffixed cost increases to, , 45,000, price, , 20 variable cost = 5, then the break-even, , point is, FC, BEQ P-VC, , 45,000, 20-5 45,000=, 15, 3,000 units, 3,000, units, , On the other hand, if fixed cost decreases to 15,000, price and variable cost, same, then the break-even point is, , remainingthe, BEQ, , FC 20-5, 15,000, PVC, , 15,000, 15, , =, , 1,000 units, , An increase in fixed cost will increase the BEP and decreases in fixed cost will decrease, the BEP., , Changes in variable cost, will, , Any change in the variable cost will shift the total cost upward or downward and hence, affect the break-even point.
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Business, , (Sem. - ), Economics (F.Y.B.Com.), , (Paper -, , 162, , = $ 35,000/1 0 . 6, , 7., , =, , $35,000/0.4, , =, , $87,500, BREAK-EVEN, , ANALYSIS, , number, , of assumptions, , as follows, , by, BEA is, The validity of the, function are linear., the r e v e n u e, and, function, 1. The cost, and variable costs., divided into fixed, is, cost, total, 2. The, conditioned, , The, , 3., , selling price, , constant., are, , identical., , productivity, firm., Average and marginal, of a multi-product, stable in the case, is, The product-mix, , 5., 6., , Factor, , It, , 8., In, , is, , a, , volume of production, sales and the, The volume of, constant., of factors are, , 4., , 8., , OF, , ASSUMPTIONS, , assumes, , practice, all, , USES OF, , of goods sold., to the quantity, is, equal, produce, that the quantity of goods, to be fulfilled., are unlikely, is, , price, , constant., , these assumptions, , BREAK-EVEN, , ANALYSIS, , in, , making, , useful for decision, , regard, , to, , pricing,, , cost, , control,, , The BEA is particularly, etc., channels of distribution,, firm. That is it, structure of the, product-mix,, the, of, profit, microscopic picture, levels of sales., 1. The BEA provides, contribution at various, know the profit, to, for cost control in, helps, BEA can be of great help, in, functions required, 2. Empirical cost, under, business., of costs and r e v e n u e, of, projections, set, flexible, becomes a, when it provides a, 3. The BEA, of profit prediction and, the, purpose, s, e, r, v, e, can, conditions, , expected, , future, , tool for profit making., 4., , margin refers the, Safety, margin'., the, 'safety, for determining, losses., The BEA can be used, sales without causing, a decline in, firm, permit, can, extent to which the, , Sales-BE, 100, Sales, , Safety Margin =1, , 5., , The BEA, , can, , the target, be useful in determining, , TFC-Target Profit, , Target Sales Volume =, , 6., , It is useful in, , profit sales volume., , Contribution Margin, , arriving at make or buy, , decision., , Break-even, , Analysis, , lowest amount, is that it indicates the, , 8., , The major benefit to, to prevent losses., of business activity necessary, with partial budgeting,, It is most useful when used, , 9., , Break-even, , 7., , use, , Analysis help, , the firm to determine, , output., 10.It, , firms in, the firm., , helps the, , bought by, 11. It helps in finding, , deciding, , out, , firm., 12.It, , helps, , in, , profitable, , determining, for, , a, , the, , which, , products, , selling price, , to, , be produced and which, , which would prove most, , the optimum level, , firm to produce., , capital budgetingtechniques., level, minimum cost for a given, , of output, below, , of, , to be, , profitable for, , the, , be, which it would not
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Break &ven Analysis, , 13., , Sometimes a, to, , product, , types of, , 9., , themanagement, product, , situation, , 163, , has to take, , decisions, dropping or adlding a, Break-even Analysis regarding, is, quite useful in handling ch, product planning., su, line., , of, , IMITATIONS OF BREAK-EVEN ANALYSIS, Thebreak-even analysis has certain, 1., , It, , is static, , condition., 2, , It is, , In the, It is not, :, , unrealistic:, , practice. Linearity, , output., 3., , 5., 6., 7., , everything is assumed to, to a, dynamic situation., , It is based, on many, of cost and, , revenue, , be constant. This, , assumptions which do, are true, only for, , implies, , a, , stati, , hold good in, limited range or, , not, , function, , a, , many shortcomings : The BEA, regards profit as a function of output only., consider the, of, impact, technological change, better management, division orIt, labour, improved, productivity and such other factors influencing8 protits., Its scope is limited to the, short run only: The BEA is not an, run analysis., effective tool for a long, to, , It assumes horizontal, demand curve with the, is not so in the case of a, It is, , difficult, , monopoly, , firm., , given price of the, , product:, , handle selling costs in the BEA :, Selling costs do, output. They manipulate sales and affect the volume of, output., to, , The traditional BEA, etc., , 8., , suited, , major limitations as, follows:, , It has, , fails, 4., , BEA,, , is very, , simple:, , When Break-even, Analysis is based, limitations of such date, , It, , makes, , on, , no, , provision, , accounting date,, , for, , not vary with, , corporate, , it may, , But this, , income tax,, , suffer from various, , 9 Break-even Analysis is only a supply side analysis, i.e. it, only analysis the cost if the, sales. It does not analysis how demand, may be affected at different price level, 10. Break-even Analysis assumes that the, quantity of goods produced is equal to, of, sold, it, means, that there is no change in the, quantity goods, quantity of goods held, in inventory at the, beginning of the period and the quantity of goods held in, inventory at the end of the period., 11., , The, too, , included, , Break-even Analysis should be limited. If too, many product,, many departments, or to0 many plants are lumped together and graphed on a, area, , in, , single break-even chart, both good and bad performances can be easily be buried in, the total picture of the group and thus the job of setting data, by, can be difficult., , product or by, , 12. It assumes that, , fixed cost, are constant. Although this is true in short run,, in the scale of production is likely to cause fixed costs to rise., , 13. In, , break-even analysis selling, , cost are difficult to handle because, , costs are a cause and not a result of changes and sales, 14. Break-even analysis is not an, effective tool for long-range, , an, , changes, , brand, , increase, in, , selling, , and its use should be, restricted to the short run only. Break-even analysis should better be limited to the, budget period of the firm, which is usually the calendar year., , SUMMARY, , use
