BREAK EVEN ANALYSIS

Break-even point represents that volume of production where total

costs equal to total sales revenue resulting into a no-profit no-loss
situation.
It examines the short run relationship between changes in volume
and changes in total sales revenue, expenses and net profit.
Also known as C-V-P analysis (Cost Volume Profit Analysis)
C-V-P analysis is an important tool in terms of short-term planning
and decision making

KEY TERMINOLOGIES IN BEP

Break even point-the point at which a company makes neither a
profit or a loss.
Contribution per unit-the sales price minus the variable cost
per unit. It measures the contribution made by each item of
output to the fixed costs and profit of the organisation.
Margin of safety-a measure in which the budgeted volume of
sales is compared with the volume of sales required to break even
Marginal Cost cost of producing one extra unit of output

FORMULA TO CALCULATE BREAK

EVEN POINT
Break-Even point in units=Fixed Cost/Contribution per
unit
Contribution per unit=Fixed cost+ Profit or Selling
priceVariable cost
Break-Even Point(Sales Value)=Fixed cost/PV Ratio
PV Ratio=(Selling price-Variable cost)/Selling price

BREAKEVEN CHART

IMPORTANCE OF BEP
The following are the benefits out of break-even analysis
Make or buy decision
Production planning
Cost control
Financial structure
Conditions of uncertainty

ASSUMPTIONS UNDERLYING BEP

All costs can be separated into fixed and variable components
Fixed costs will remain constant at all volumes of output
Variable costs will fluctuate in direct proportion to volume of output
Selling price will remain constant
The number of units of sales will coincide with the units produced so
that there is no opening or closing stock
Productivity per worker will remain unchanged.

APPLICATION OF BEP
It helps in the determination of selling price which will give the desired
profits.
It helps in the fixation of sales volume to cover a given return on capital
employed.
It helps in determination of costs and revenue at various levels of output.
It is an aid in management decision-making (e.g., make or buy,
introducing a product etc.), forecasting, long-term planning and
maintaining profitability.
It reveals business strength and profit earning capacity of a firm without
much difficulty and effort.

LIMITATIONS OF BREAK-EVEN ANALYSIS

It assumes that fixed costs remain constant at all levels of activity. It

should be noted that fixed costs tend to vary beyond a certain level of
activity.
It assumes that the business conditions may not change which is not
true.
It assumes that production and sales quantities are equal and there
will be no change in opening and closing stock of finished product,
these do not hold good in practice.
The break-even analysis does not take into consideration the amount
of capital employed in the business. In fact, capital employed is an
important determinant of the profitability of a concern.