Break Even Analysis
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Industrial Economics and Management, Schemes and Mind Maps of Industrial economy
The concept of break even analysis, which is used to determine the point at which a business can cover all its expenses and begin to make a profit. It covers factors to be considered in the analysis, such as fixed and variable costs, total revenue, and contribution margin. It also explains how to calculate contribution margin per unit and margin of safety. formulas and examples to illustrate the concepts.
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2022/2023
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Break Even Analysis
Introduction
- (^) Breakeven analysis is the business analysis used
to determine the probable point at which when
your business will be able to cover all its
expenses and begin to make a profit.
- (^) In simple words, it is point at which a firm
makes ‘no profit or no loss’.
- (^) Breakeven analysis can be done to determine
either the breakeven point or the breakeven
volume.
IMPORTANCE OF BEP ANALYSIS
- To identify your start-up costs and also helps to determine the sales revenue needed to pay for ongoing business expenses.
- To determine business gross (or contribution) margin
- It aids in developing proper product pricing strategy through knowledge of its gross margin.
- It is an important reference point that enters into planning and carrying out business activities.
FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
- (^) Fixed Cost: Costs associated with the use of fixed factors of production are called fixed costs.
- (^) Fixed costs are overhead-type expenses that are constant and do not change as the level of output changes.
- (^) It is invariable and it has borne by the firm regardless of the level of Sales.
FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
- (^) Total Revenue: is an product of Total Sales and price per unit. - (^) Total Revenue = Total Sales (S) x Selling price per unit(p)
- (^) Profit/Loss: Total Revenue – Total Cost.
- (^) Profit, if Revenue exceeds Total cost.
- (^) Loss, if Total cost exceeds Revenue.
Break Even Analysis
Contribution Margin
- (^) Contribution Margin (CM) is equal to the difference between total sales/Sales Revenue(S) and total variable cost.
- (^) In other words, it is the amount by which total sales/Sales Revenue(S) exceed total variable costs (VC).
- (^) In order to make profit, the contribution margin of a business must exceed its total fixed costs.
- (^) Formula to calculate Contribution Margin is as follows: Contribution Margin(CM) = Sales Revenue(S) – Total Variable Cost (VC)
Contribution Margin Per Unit
- (^) Contribution Margin can also be calculated per unit which is called Contribution Margin per unit.
- (^) It is the excess of sales price per unit (p) over variable cost per unit (v).
- (^) Thus, that sales price per unit minus variable cost per unit is the contribution margin per unit.
- (^) CM per unit = selling price per unit(p) – Variable Cost per unit(v)
Example: Delta Enterprises
- (^) Fixed cost = Rs. 20,00,000.
- (^) Variable cost per unit (v) = Rs. 100.
- (^) Selling price per unit(p) = Rs. 200.
- (^) Actual production quantity = 60,000 units.
- (^) Find
- (^) Break Even Quantity.
- (^) Break Even Sales.
- (^) Contribution.
- (^) Margin of Safety by both the methods.
Break Even Quantity and BES.
- (^) Formula to calculate Break Even Quantity:
- (^) Formula to calculate Break Even Sales:
- (^) Note: BEQ is expressed in terms of units and BES is expressed in terms of Rupees.
Margin of Safety
- (^) Method – 1: Margin of Safety = Total Sales – Break Even Sales
- (^) Method – 2:
- (^) Formula to calculate profit = Total Revenue – Total Cost