MECHANICS OF BREAK EVEN ANALYSIS

Revenue

Total Cost (TC) Profit R e v e n u e BEP

Loss Margin of Safety

Fixed Cost (F)

Break Even Sales

Operating Sales

Volume of Business Figure: Factors influencing Break Even Point

1. Contribution = [Sales price per unit] [Variable Cost per unit] Gross Contribution (C) = [Total Revenue(S)] [Total Variable Cost (V)] Gross Contribution = Fixed Cost + Price 2. Profit Volume Ratio P/V Ratio = [Contribution per Unit / Selling Price per Unit] = [Gross Contribution / Total Revenue] = 1 (V/S) 3. Margin of Safety MS = [(Operating Sales Break even Sales) / Operating Sales]* 100 4. Break Even Sales (Q0) Q0 = [F / P/V Ratio] = [F/1 (V/S)]

5. Operating Sales (Q) Q = [(F + P) / P/V Ratio] = [(F+ P) /1 (V/S)] 6. Profit Formulae P = Q (F+VC) = Q* {(P/V Ratio)} F = (Q - Q0) * (P/V Ratio) = Sales (Fixed Cost + Variable Cost)

EFFECT OF CHANGES IN SALES VOLUME Decrease in Volume by 10% 45,000 1,80,000 90,000 80,000 1,60,000 0.5 10,000 12.50% Increase in Volume by 10% 55,000 2,20,000 1,00,000 80,000 1,60,000 0.5 30,000 37.50%

Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 25%

Revenue

Added Profit R e v e n u e BEP

Total Cost (TC)

Variable Cost (V)

Loss

Fixed Cost (F) Margin of Safety

0
Volume of Business

Break Even Sales

Operating Sales (old)

Operating Sales (new)

Figure: Change in Sales Volume

EFFECT OF CHANGES IN FIXED COSTS Decrease in Volume by 10% 50,000 2,00,000 1,00,000 72,000 28,000 0.5 1,44,000 38.00% Increase in Volume by 10% 55,000 2,00,000 1,00,000 88,000 12,000 0.5 1,76,000 13.63%

Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

Normal Value 50,000 2,00,000 1,00,000 80,000 20,000 0.5 1,60,000 25%

Revenue

BEP

TC

TC
R e v e n u e

Added Profit

BEP

FC
Margin of Safety (MS)

FC
Margin of Safety(MS)

Volume of Business

Operating Sales(Q)

Figure: Change in Fixed Cost

Revenue TC
BEP

TC
R e v e n u e

Drop in Profit

BEP

FC
Margin of Safety (MS)

FC
Margin of Safety(MS)

Volume of Business

Operating Sales(Q)

Figure: Change in Fixed Cost

INFERENCES: 1. 2. 3. 4. 5. 6. Margin of Safety increases, Fixed Cost reduces. Margin of Safety reduces Fixed Cost increases. BEP reduces, Fixed Cost reduces. BEP increases, Fixed Cost increases. Profit increases, Fixed cost reduces. Profit reduces Fixed Cost increases.

EFFECT OF CHANGES IN SELLING PRICE Decrease in Volume by 10% 50,000 1,80,000 1,00,000 80,000 1,81,818 0.44 0 -1.00% Increase in Volume by 10% 50,000 1,80,000 1,00,000 80,000 1,45,455 0.55 40,000 -23.70%

Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 -25%

Sales

Sales

Added Profit TC

BEP BEP Margin of Safety (MS)

FC

Margin of Safety(MS)

Volume of Business

Operating Sales(Q)

Figure: Change in Selling Price

Sales

Sales

TC

Drop in Profit
BEP BEP Margin of Safety(MS)

FC
Margin of Safety(MS)

Volume of Business

Operating Sales(Q)

Figure: Changes in Selling Price

INFERENCES: 1. Direct effect on P/V ratio due to changing angle of incidence Selling Price decreases, P/V ratio increases 2. Margin of safety Margin of safety increases, revenue increases. Margin of safety reduces, revenue reduces. 3. Profit Profit increases, sales increases. Profit reduces, sales reduces.

EFFECT OF CHANGES IN VARIABLE COST Decrease in Volume by 10% 50,000 2,00,000 90,000 80,000 1,45,455 0.55 30,000 -1.00% Increase in Volume by 10% 50,000 2,00,000 1,10,000 80,000 1,77,778 0.45 10,000 -23.70%

Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 -25%

Revenue TC
BEP

TC
R e v e n u e

Drop in Profit

BEP
Margin of Safety (MS)

FC

Margin of Safety(MS)

Volume of Business

Operating Sales(Q)

Figure: Change in Variable Cost

Revenue TC
BEP

TC
R e v e n u e

Added Profit

BEP

FC
Margin of Safety(MS)
Margin of Safety (MS)

Volume of Business

Operating Sales(Q)

Figure: Change in Variable Cost

INFERENCES: 1. 2. 3. 4. 5. 6. 7. 8. Margin of Safety increases, Variable Cost reduces. Margin of Safety reduces Variable Cost increases. Variable Cost decreases, BEP decreases. Variable Cost increases, BEP increases. Profit increases, Variable cost reduce. Profit reduces, variable cost increases. P/V Ratio increases, Variable cost reduces. P/V Ratio decreases, variable Cost increases