BREAK EVEN POINT &

ANALYSIS
DEFINITION
 The break even point is the
point where the gains equal
the losses.
 The point defines when an
investment will generate a
positive return.
 The point where sales or
revenues equal expenses.
 The point where total costs
equal total revenues.
 There is no profit made or
loss incurred at the break
even point.
CALCULATION OF THE BREAK EVEN
POINT

 VARIABLE COST-
They are directly related to the volume of sales: that is these cost
increase in proportion to the increase in sales and vice versa.

 FIXED COST -
Fixed costs continue regardless of how much you can sell or not sell,
and can be made up of such expenses as rent, wages, telephone account and
insurance. These cost can be estimated by using last years figure as a basis,
because they typically do not change.
 BREAK EVEN ANALYSIS
 It refers to the ascertainment of level of operations
where total revenue equals to total costs.
 Analytical tool to determine probable level of operation.
 Method of studying the relationship among sales,
revenue, variable cost, fixed cost to determine the level
of operation at which all the costs are equal to the
sales revenue and there is no profit and no loss
situation.
 Important techniques is profit planning and managerial
decision making.
DEFINITIONS

 Fixed Cost:
The sum of all costs required to produce the first unit of
a product. This amount does not vary as production
increases or decreases, until new capital expenditures
are needed.
 Variable Unit Cost:
Costs that vary directly with the production of one
additional unit.
 Expected Unit Sales:
Number of units of the product projected to be sold
over a specific period of time.
 Unit Price:
The amount of money charged to the customer for
each unit of a product or service.
 DEFINITIONS CONT
 Total Variable Cost:
The product of expected unit sales and variable unit cost.
(Expected Unit Sales * Variable Unit Cost )
 Total Cost:
The sum of the fixed cost and total variable cost for any given
level of production.
(Fixed Cost + Total Variable Cost )
 Total Revenue:
The product of expected unit sales and unit price.
(Expected Unit Sales * Unit Price )
 Profit (or Loss):
The monetary gain (or loss) resulting from revenues after
subtracting all associated costs. (Total Revenue - Total Costs)
 DEPENDENCE
 Break even analysis depends on the following variables:
 The fixed production costs for a product.
 The variable production costs for a product.
 The product's unit price.
 The product's expected unit sales [sometimes called projected
sales.]
 On the surface, break-even analysis is a tool to calculate at which
sales volume the variable and fixed costs of producing your
product will be recovered.
 It can also use break even analysis to solve managerial problems.
 ADVANTAGE

 It is cheap to carry out and it can show

the profits/losses at varying levels of
output.
 It provides a simple picture of a business
- a new business will often have to
present a break-even analysis to its bank
in order to get a loan.
 LIMITATIONS
 Break-even analysis is only a supply side (i.e. costs only) analysis,
as it tells you nothing about what sales are actually likely to be for
the product at these various prices.
 It assumes that fixed costs (FC) are constant
 It assumes average variable costs are constant per unit of output,
at least in the range of likely quantities of sales. (i.e. linearity)
 It assumes that the quantity of goods produced is equal to the
quantity of goods sold (i.e., there is no change in the quantity of
goods held in inventory at the beginning of the period and the
quantity of goods held in inventory at the end of the period).
 In multi-product companies, it assumes that the relative
proportions of each product sold and produced are constant (i.e.,
the sales mix is constant).
THANKS !