BREAK EVEN ANALYSIS

BEA

Enables the Management to ascertain the movement of profit with changes in the volume of sales

BEP
It is the level of output where the TR equal to TC
Y TR

Cost Revenue Profit

Profit

TC

Loss

X O M Output

FORMULA TO FIND OUT BEP

BEP = TFC

P AVC
TFC P AVC = TOTAL FIXED COST = PRICE PER UNIT = AVERAGE VARIABLE COST

P AVC SHOWS CONTRIBUTORY MARGIN [CM] THE EQUATION CAN BE WRITTEN AS BEP = TFC CM

Eg:
1. TFC Rs. 2000 Price= Rs. 30 AVC = Rs. 10 BEP = 2000 = 100 units 30-10

2.

TFC = 20,000 Price = 50 BEP = 20,000 = 50 percent = Rs. 40,000

AVC = 25 100 x 20,000 50

APLLICATION OF BREAK-EVEN ANALYSIS IN DECISION MARKING

1. 2. 3. 4. 5. PRICE QUALITY DECISION SELECTION OF SUITABLE TECHNOLOGY TO ACHIEVE TARGETTED PROFIT MAKE OR BUY DECISIONS TO DECIDE PROMOTIONAL EXPENDITURE

PRICE QUALITY DECISION

Y TR1 TR TC

At Sales Volume

Price

A C B D

ox1-A is BEP
TC1

Ox2-B Ox3-C Ox4-D

X

x4 x3

x2 x1 Quantity

SELECTION OF SUITABLE TECHNOLOGY

Plant 1
Price [Rs]

Plant 2

Plant 3

8
80,000 4

FC [Rs] AVC [Rs]

1,80,000 2,80,000 2 1

Sales level

units

Plant 1
Profit/Loss [Rs.]

Plant 2
Profit/Loss [Rs.]

Plant 3
Profit/Loss [Rs.]

10,000 20,000 30,000 40,000

- 40,000 BEP 40,000 80,000

- 120,000 - 60,000 BEP 60,000

- 2,10,000 - 1,40,000 - 70,000 BEP

50,000
60,000 70,000 80,000 90,000 1,00,000 1,10,000 Plant 1 Plant 2 Plant 3

1,20,000
1,60,000 2,00,000 2,40,000 2,80,000 3,20,000 3,60,000

1,20,000
1,80,000 2,40,000 3,00,000 3,60,000
4,20,000

70,000
1,40,000

2,10,000 2,80,000
3,50,000 4,20,000 4,90,000

4,80,000

Is profitable upto output of 50,000 units Is profitable upto output of 1,00,000 units Is profitable BEYOND 1,00,000 units

TO ACHIEVE TARGETTED PROFIT

BEA helps to plan the production and sales to achieve the targeted profit. Sales Volume = TFC + Targeted Profit P AVC

Eg: A company wanted to make the profit of Rs. 7,50,000. Its FC per year is Rs. 7,50,000. Price = 85 VC = 10 Sales Volume 7,50,000 + 7,50,000 85 10 = 20,000 units = 15,00,000 75

[Rs. 17,00,000]

To take, make or buy decision

Eg:
A firm use to buy the part of a product for Rs. 24. The annual demand is 6000 units. If the product is manufactured within the factory, the FC = Rs. 1,00,000 VC = Rs 4 Whether the decision is rational BEP = units FC P VC = 1,00,000 24 - 4 = 5000

Inhouse production is better than purchase from outside.

Deciding Promotional Expenditure

Eg: A firm manufactures toys and sells it for Rs. 60 per unit. The annual sale is 5,500 units. The fixed cost per year is Rs. 2,00,000 and variable cost is Rs 20. It wanted to know whether it can spend Rs. 40,000 on promotional activity?

BEP = 2,00,000 60 20

2,00,000 = 5,000 units 40

2,40,000 = 6,000 units 40

= 2,00,000 + 40,000 = 60 20

It cannot spend Rs 40,000 because total sales is limited to 5,500 units.

The case of Multi-Product Firm

Eg: A multi-product firm produces three products x,y and z. The details Price, VC and share of each in Gross Revenue is as follows:
Product Price VC Share in GR

X Y Z
Gross Sales Volume
Annual Fixed Cost Question: u Find out BEP

4 5 8
= Rs. 1,50,000
= Rs. 23,000

3 4 6

20 40 40

Find out Profit / loss at 80% capacity utilisation

Product

Price

VC

Share

Share of VC%

FC +

20

75

25

40

80

20

40

75

25

Share in GR X 20

Share to FC + 25 % of 20% 5%

Y
Z

40
40

20 % of 40%
25 % of 40 % Share to FC + Profit

8%
10 % 23 %

BEP = FC

or S VC

FC
CM Rs 1,00,000

23000 = 23/100

23000 * 100 23

At 80% capacity GR = 1,20,000 BEP = FC + VC, 23,000 + 77% [1,20,000] 23,000 + 92,400 = 1,15,400 BEP = 1,15,400 Profit = 1,20,000 1,15,400 = 4,600

THANK YOU