break even analysis

BREAK-EVEN ANALYSIS

By:Rahat Inayat Ali

INTRODUCTIONIt is a method for finding out the minimum level of sales necessary for a firm to just start to make a profit

It examines the cost tradeoffs associated with demand volume.

Break-even analysis is analysis of total costs-sale of product-total revenue

Meaning

Break even analysis is actually an analysis of break even point

Break Even PointIn economics it is the point at which cost or expenses and income are equal - there is no net loss or gain, one has "broken even".

The break even point for a productis the point where total revenue received equals total costs associated with the sale of the product i.e. CT=RT

CT = total costsRT = total revenues

Linear Breakeven Analysis

Cost

Quantity (Q)Break Even Point

Profit

loss

Break-even analysisBreak-even analysis can be an effective tool in determining the cost effectiveness of a product.

Required quantities to avoid loss.

When total revenue is equal to total cost the process is at the break-even point.

TC = TR

Use as a comparison tool for making a decision

Solution methods

1. ALGEBRIC : BEP quantity is calculated by the profit equation: Profit=Revenues-cost

2. BY 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.

1. ALGEBRIC METHOD

q = quantity of product and quantity soldcv = variable cost per unitp = selling price per unit CF = total fixed cost per unitCV = progressive variable costs per yearCT = total costs per yearRT = total revenues per yearCT = CF + CV = CF + cv x qRT = p x q

B.E.P. occurs when CT=RT