BREAK EVEN ANALYSIS

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BREAK EVEN ANALYSIS

• Break Even Analysis is a method for
  identification the relationship between costs and
  volume of output and profit.The point where the
  sales, revenue equals total cost and there is
  neither profit nor loss.
• WHY B.E.P. IS CALCULATED ?
• A term loan should be serviced out of profits. If
  the unit functions at a sales level at which
  there is no profit, it is natural that it cannot
  repay the term loan instalments. This brings the
  necessity for calculating the level of sales
  above which profits are earned by the unit.

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CLASSIFICATION OF COSTS

• Fixed Costs
• 1.Wages of permanent labour 2.Salaries of
  administrative staff
• 3.Rent 4.Taxes
• 5.Insurance 6. Interest on term loans
• 7.Maintenance expenses 8. Travelling expenses/
• conveyance
• 9.Postage and Stationery 10. Telephone expenses
• 11. Depreciation etc.

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CLASSIFICATION OF COSTS Contd

• Variable Costs
• 1.Raw Material 2. Consumables
• 3.Power and Fuel 4. Inward Carriage
• 5.Packing material 6. Interest on working
  Capital
• 7.Direct Labour etc
• These are also called as Marginal Costs
• Semi-variable costs
• Semi variable costs are hybrid costs made up of
  fixed element and a variable element.
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TECHNQUE

• OPTIMUM CAPACITY
• Choose the year of optimum capacity utilisation.
• CLASSIFICATION OF COSTS
• Classify costs into variable fixed costs
• CONTRIBUTIN
• Contribution per unit of product Sales Price
  per unit
• Variable costs per unit
• CALLCULATION OF BEP
• Fixed Cost
• BEP in units -------------
• Contribution per unit
• BEP in Rupee BEP in units x SP per unit or
• Fixed cost x Total sales in Rs.
• ----------------------------------
  Total contribution
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TECHNQUE Contd.

• BEP IN CAPACITY
• (F.C. X Projected Capacity Utilisation at
  Optimum Level)
• -----------------------------------------------
  ----------------
• Total Contribution
• CASH BEP
• It is the point of sale at which the unit does
  not incur cash loss or generate cash profit.
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MARGIN OF SAFETY (MOS)

• The difference between actual or budgeted sales
  and break-even sale is known as margin of safety.
• USES
• To study the viability of the project
• To decide optimum product mix
• To decide the required level of production in
  order to attend a desired level of profit
• Note
• a) We can workout Margin of Safety by the
  Following method
• Margin of safety
• Sales level (Rs)- Break even level of sales
  (Rs) x 100
• Sales Level (Rs)
• This is expressed as a percentage
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MARGIN OF SAFETY (MOS) Contd

• b) The unit earns profits only if It is able to
  work above its BEP
• c) The BEP is dependent on the variable expenses
• It is desirable that the BEP or BE level of
  sales is estimated at periodic intervals to
  ensure that the unit is always operating above
  Break Even Point.
• d) The repayment of the term loan, if any will be
  out of the surplus generated
• e) Break Even Analysis (Marginal Costing) is a
  very powerful tool in taking various management
  decisions such as capital investment decisions ,
  make or buy decisions, pricing etc.
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