BREAK EVEN ANALYSIS Basic assumptions - Break Even Chart Managerial uses of Break Even Analysis Applications of Break

Even Analysis in Engineering Projects.

BEP may be defined as that level or point of sales volume at which the total revenue is equal to total costs.

TR = TC
Simply, it is a no-profit, no-loss point. This is also a minimum point of production where total costs are recovered. If sales exceeds the Break Even Point, business earns a profit. If sales below the Break Even Point, the business incurs a loss.

Assumptions of Break Even Analysis:

All Costs are segregated into fixed and variable cost.

Total fixed costs are constant at all levels of output.

Production and Sales figures are same. Variable costs vary proportionately with the level of volume of output. Selling Price per unit and operational efficiency remains unchanged.

Assumptions of Break Even Analysis:

Production and Sales are same. Volume of sales and volume of production are equal

hence there is no unsold stock.

There is only one product.

If there are multiple products, sales mix remains

constant. There will be no change in the general price level. Cost and Revenue depend only on volume of production or output and not on any other factor.

Merits of BEP:
Enables to provide more detailed information and easily
understandable than those of profit & loss account and

balance sheet information.

To determine the total cost, fixed cost, and variable cost. Product Planning. Inter-firm comparison is possible. To select the best product mix. Choosing the best promotion mix. To take the make or buy decisions.

Merits of BEP:
Preparation of flexible budget.
Formulation of price policy.

It provides guidance for cost control.

To find out the profitability of different levels of activity and various products. Total profit could be calculated accurately.

Demerits of BEP:
Fixed cost does not always remain constant.

It ignores economies of scale in production.

Variable costs do not always vary proportionately. No importance is given to the opening and closing stocks. Only limited information is provided by the BEP. Study concentrates only on sales mix or product mix. Sales revenue does not always change proportionately.

Computation of BEP:
1. Problems given in values:

Fixed Cost * Sales BEP Sales Variable Cost

2. Problems given in unit:

Fixed Cost BEP Selling Pr ice per unit Variable Cost per unit

3. Problems given in values:

Fixed Cost BEP P / V Ratio

Contribution P / V Ratio *100 Sales
Contribution = Sales Variable Cost Or Contribution = Fixed Cost+Profit

Angle of Incidence:
Angle of incidence indicates the profit earning capacity. The angle is formed at the break even point where the sales line cuts the total cost line. The angle may be large or small. Large angle of incidence

indicates higher profit rate and vice versa.

(ii) From the following details ,calculate the break even point .What will be the selling price per unit if break even point to be brought to 900 units: Variable cost per units Rs 750 Fixed expenses Rs 27,00,000

Selling price per unit Rs 1,000

((b) A manufacturing company has extra capacity which can be used to produce gears that the company has been buying for Rs 300 each. If the company makes the gears, it will incur material cost of Rs 90 per unit, labour cost of Rs 120 per unit and variable overhead cost of Rs 30 per unit .The annual fixed cost associated with the unused capacity is Rs 2, 40,000. Demand over the next year is estimated at 4000 units. (i)Should company make the gears or continue to buy?
(ii)Suppose the capacity could be used by another department for the production of the same pump components that would cover its fixed and variable cost and contribute Rs 90,000 to profit. What would be more advantageous, gear production or pump components production?

((b) A manufacturing company has extra capacity which can be used to produce gears that the company has been buying for Rs 300 each. If the company makes the gears, it will incur material cost of Rs 90 per unit, labour cost of Rs 120 per unit and variable overhead cost of Rs 30 per unit .The annual fixed cost associated with the unused capacity is Rs 2, 40,000. Demand over the next year is estimated at 4000 units. (i)Should company make the gears or continue to buy? (ii)Suppose the capacity could be used by another department for the production of the same pump components that would cover its fixed and variable cost and contribute Rs 90,000 to profit. What would be more advantageous, gear production or pump components production?