BREAK EVEN ANALYSIS

FORMULA AND CALCULATIONS

 OBJECTIVES

Contents:
 Meaning of Break-Even Analysis
 Assumptions of Break-Even Analysis
 Break Even Point
 Types of Break-Even Point
 Graphic Method of Break-Even Analysis
 Assumptions Underlying Break-Even Charts
 Advantages of Break-Even Charts
 Limitations of Break-Even Charts
 Margin of Safety
 Angle of Incidence
 Profit-Volume Graph
 Curvilinear Break-Even Analysis (Two Break-Even Points)
 Meaning of Break-Even Analysis

 The study of cost-volume profit analysis is often referred

to as ‘break-even analysis’ and the two terms are used
interchangeably by many. This is so, because break-even
analysis is the most widely known form of cost-volume-
profit analysis. The term “break-even analysis” is used in
two senses—narrow sense and broad sense.
 In its broad sense, break-even analysis refers to the study
of relationship between costs, volume and” profit at
different levels of sales or production. In its narrow
sense, it refers to a technique of determining that level of
operations where total revenues equal total expenses, i.e.,
the point of no profit, no loss.
 Assumptions of Break-Even Analysis

The break-even analysis is based upon the

following assumptions…….
(i) All elements of cost, i.e., production,
administration and selling and distribution can be
segregated into fixed and variable components.
 (ii) Variable cost remains constant per unit of output
irrespective of the level of output and thus fluctuates
directly in proportion to changes in the volume of
output.
 (iii) Fixed cost remains constant at all volumes of
output.
 Assumptions of Break-Even Analysis

The break-even analysis is based upon the

following assumptions…….
 (iv) Selling price per unit remains unchanged or
constant at all levels of output.
 (v) Volume of production is the only factor that
influences cost.
 (vi) There will be no change in the general price-
level.
 (vii) There is only one product or in case of multi-
products, the sales mix remains unchanged.
 Assumptions of Break-Even Analysis Cont’d

(iv) Selling price per unit remains unchanged or

constant at all levels of output.
(v) Volume of production is the only factor that
influences cost.
(vi) There will be no change in the general price-level.
(vii) There is only one product or in case of multi-
products, the sales mix remains unchanged.
(viii) There is synchronisation between production and
sales.
 Break Even Point (BEP)

 The break-even point may be defined as that point of

sales volume at which total revenue is equal to total cost.
It is a point of no profit, no loss. A business is said to
break-even when its total sales are equal to its total costs.
The break-even point refers to that level of output which
evenly breaks the costs and revenues and hence the
name.
 At this point, contribution, i.e., sales minus marginal
cost, equals the fixed costs and hence this point is often
called as ‘Critical Point’ or ‘Equilibrium Point’ or
‘Balancing Point’ or no profit, no loss. If production/sales
is increased beyond this level, there shall be profit to the
organisation and if it is decrease from this level, there
shall be loss to the organisation.
 Break-Even Point In Equation Form

 Sales revenue at BEP= Fixed Costs + Variable Costs

SV = FC + VC
Computation of the Break-Even Point

The break-even point can be computed by the

following methods:
(i) The Algebraic Formula Method
(ii) Graphic or Chart Method.
Algebraic Formula Method for Computing the Break-Even Point

The break-even point can be computed in

terms of:
(a) Units of sales volume.
(b) Budget total or in terms of money value.
(c) As a percentage of estimated capacity.
 Break-Even Point in Units

As the break-even point is the point of no

profit no loss, it is that level of output at
which the total contribution equals the total
fixed costs, It can be calculated with the help
of following formula:

 BEP = FC
SP/U – VC/U FC = fixed cost
SP/U = selling price per unit
= FC VC/U = variable cost per unit
Contribution Margin
Break-even Point in terms of budget-total or money value
 Break-even Point as a percentage of estimated capacity

 Break-even point can also be computed as a percentage

of the estimated sales or capacity by dividing the break-
even sales by the capacity sales.
 If a firm has an estimated capacity of 100,000 units of
products and its break-even point is reached at 50,000
units, then the break-even point is at 50% of capacity
(100,000/50,000).
 If information as to total contribution at full capacity is
available, the break-even point as a percentage of
estimated capacity can be found as under:
 B.E.P (as % age of capacity) =
Fixed Cost/Total Contribution
 Break-even Point as a percentage of estimated capacity

From the following information, calculate the

break-even point in units and in sales value:
 Output = 3,000 units
 Selling price per unit = $30
 Variable cost per unit =$20
 Total fixed cost = $20,000
 Break-even Point as a percentage of estimated capacity

Solution
 Types of Break-Even Point

(i) Cash Break-Even Point:

 In the present competitive world of business, it may be difficult for
new industrial units to achieve the break-even point in the initial
years. Thus, the concept of cash break-even point has emerged. The
cash breakeven point may be defined as that point of sales volume
at which total revenue is equal to total cash cost.
 At this point, cash contribution (which is calculated after making
adjustment for variable portion of depreciation, etc.) equals the cash
fixed cost, i.e., fixed cost excluding depreciation and deferred
expenses. This point enables the management to determine the level
of activity below which the liquidity position of the firm would be
adversely affected.
Thus, cash break-even point may be calculated as below:
 Cash Break- Even Point (in Units) =
Cash Fixed Cost/Cash Contribution per unit
 Cash Break Even

Example
 Cash Break Even

Solution