BY-BY-B-31 MAYURI VADHERB-31 MAYURI VADHER

SNEHALSNEHAL

Introduction• Efficient allocation of fund is one of the most imp function of any firm, which

includes allocation of fund in long term assets and its profitability.

there are various methods of investment analysis one of it is Deterministic model under which Break even analysis comes.

• Break even analysis is a form of cost-volume-profit(CVP) analysis

• CVP analysis give the overview of the product which the company must sell so that no losses are incurred and the sale volume at which the profit objective of the firm can be achieved.

• Following are the findings are answered threw implementing CVP– What might be the maximum volume of a company so that company does

not suffer from any loss?– what level of sales shall be achieved?– how are the profit changed with the change in price, cost or volume?

Break Even Analysis

• Break even analysis is a management decision making tool designed to relate factors of total sales and total cost at a certain level of volume.

• It represents the level of sales at which costs and revenues are in equilibrium; is known as break even point.

Assumptions:

1. The total cost can be separated into fixed and variable costs

2. The total fixed cost remains unchanged with changes in sales volume

3. Variable cost per unit is constant

4. The selling price per unit is constant i.e., it does no change with volume

Factors of cost-volume• Fixed costs - Do not vary with production change and sales activity

• Variable costs - Change with the change in level of production and sales activity

• Semi-variable costs - Partially fixed and partially variable

• Sales price = sales-variable costs/sale

Other concepts:

• Contribution margin - excess of selling price over variable cost

= Total sales(S) - Total variable cost(V)

• Profit/ volume ratio - it compares the profit earned based on the volume of product sold and examines how the two figures relate at different values

• Margin of safety- excess of actual sales over break even sales

Margin of safety= Actual Sales(in Rs) – BEP Sales(in Rs)

Approaches for break even point1. The formula approach-

In units - BEP(in units)= F.C/(Selling price per unit(s)- Variable cost per unit(v))

In money value - BEP(in rs) =

2. In chart format- pictorial view of relationship between costs, volume and profit. Construction Steps:

I. Sales revenue along the horizontal axis.

II. Revenue, fixed and variable costs along the vertical axis.

III. Fixed cost line parallel to horizontal axis.

IV. Draw total sales line and total cost line, intersection of them is break even point.

marginal safety ratio = Actual sales (in Rs) – BEP Sales(in Rs)

Break Even Analysis Charts

Manufacturing ExpenseSelling ExpenseGeneral Expense

Total costs

Break Even for Multiproduct Firm

• Most manufacturer, wholesaler, and retailers are engaged into selling many product.

Applications Break Even Analysis

• Profit planning

• Product planning

• Product pricing

• Selection of advertising media

• Selection in distribution channels

• Make v/s buy v/s leasing

• Equipment selection and replacement

Merits and Drawbacks

1. Simple concept to interpret the accounting data

2. Useful in identifying falling profits and indicate the action to be taken

3. Risk assessment of the project

4. Provides basic information for further profit improvements

5. Helps in deciding which product to be produced

6. Plant expansion or contraction decision can be made

7. Dropping or adding a product

8. Helps in the choices between various alternative projects

9. Used in finding selling price for profit increase

1. Separation of costs into fixed and variable is difficult

2. May be useful for short term but limited use for long term

3. Difficult to use for multiproduct firm

4. Assumes constant relationship between costs and revenue

Examples

Example 1

Example 2

Conclusion

• Break even analysis is a quantitative method that depicts cost-revenue-volume relationships, permits management to loos into the future in order to estimate the effects of certain decisions on firm’s profit.

• It should be an integral part of the budgeting process, after all management’s goal is to maximize its profit and return on total assets.