[go: up one dir, main page]
Scribd
Upload
28 views15 pages

Break Even Analysis

Break-even analysis determines the output level where total revenues equal total costs, resulting in zero economic profit. It classifies costs into fixed and variable, aiding in decision-making regarding pricing, sales volume, and profitability forecasting. The analysis helps businesses understand their cost structure and make informed management decisions.

Uploaded by

sh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
28 views15 pages

Break Even Analysis

Break-even analysis determines the output level where total revenues equal total costs, resulting in zero economic profit. It classifies costs into fixed and variable, aiding in decision-making regarding pricing, sales volume, and profitability forecasting. The analysis helps businesses understand their cost structure and make informed management decisions.

Uploaded by

sh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 15

BREAK EVEN

ANALYSIS
INTRODUCTION
 Break-even point is that point of output level of the firm where firms total revenues
are equal to total costs (TR = TC). Economic profit is the excess of total revenue
than the total costs i.e. (TR – TC) or (TR>TC), so at break-even point when TR =
TC, the firm neither earns profit nor incurs loss or is a situation of zero economic
profit.
 In break even analysis Costs can be classified as either a fixed cost or a variable
cost. A fixed cost is one that is independent of the level of sales; rather, it is related
to the passage of time.
 Examples of fixed costs include rent, salaries and insurance. A variable cost is one
that is directly related to the level of sales, such as cost of goods sold and
commissions.
 Thus; Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
Total Revenue (TR) = Total Output (Q) * Price per unit of output (P) = QP Economic
Profit or loss = Total Revenue (TR) - Total Costs (TC) Break-even Point = TR = TC
or TR - TC = zero The firm will incurs loss if it operates below this point and will
earn profit if it operates beyond this point.
 It may however be noted that by producing at the level of break-even point, a firm
covers only its cost of production. Normal profit is included in the cost of
production. Thus, at break-even point a firm gets only normal profit or zero
economic profit.
BREAK EVEN POINT
BREAK EVEN CHART/GRAPH
APPLICATIONS OF BREAK EVEN
ANALYSIS
 (i) It helps in the determination of selling price which will give
the desired profits.
 (ii) It helps in the fixation of sales volume to cover a given
return on capital employed.
 (iii) It helps in forecasting costs and profit as a result of
change in volume.
 (iv) It gives suggestions for shift in sales mix.
 (v) It helps in making inter-firm comparison of profitability.
 (vi) It helps in determination of costs and revenue at various
levels of output.
 (vii) It is an aid in management decision-making (e.g., make
or buy, introducing a product etc.), forecasting, long-term
planning and maintaining profitability.
 (viii) It reveals business strength and profit earning capacity of
a concern without much difficulty and effort.
1. BREAK EVEN POINT IN TERMS OF PHYSICAL UNITS
(UNITS)
2. BREAK EVEN POINT IN TERMS OF SALES VALUE
(RS)
3. SAFETY MARGIN (%)
4. VOLUME NEEDED TO ATTAIN TARGET PROFIT
5. CHANGE IN PRICE
5. CHANGE IN PRICE
6. CHANGE IN COST
6. CHANGE IN COST

You might also like