Download Industrial Economics and Management and more Schemes and Mind Maps Industrial economy in PDF only on Docsity! Break Even Analysis Introduction • Breakeven analysis is the business analysis used to determine the probable point at which when your business will be able to cover all its expenses and begin to make a profit. • In simple words, it is point at which a firm makes ‘no profit or no loss’. • Breakeven analysis can be done to determine either the breakeven point or the breakeven volume. FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS • Fixed Cost: Costs associated with the use of fixed factors of production are called fixed costs. • Fixed costs are overhead-type expenses that are constant and do not change as the level of output changes. • It is invariable and it has borne by the firm regardless of the level of Sales. FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS • Variable Cost(VC): Costs associated with the use of variable factors of production are called variable costs. • It varies to the level of output. – Variable Cost(VC) = Variable cost per unit(v) x Total Sales (s) • Variable Cost per unit(v): Variable Cost incurred to produced one unit of output. • Total Cost: Summation of the Fixed cost and Variable cost. – Total Cost = Fixed cost + Variable cost. FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS • Total Revenue: is an product of Total Sales and price per unit. – Total Revenue = Total Sales (S) x Selling price per unit(p) • Profit/Loss: Total Revenue – Total Cost. – Profit, if Revenue exceeds Total cost. – Loss, if Total cost exceeds Revenue. Contribution Margin • Contribution Margin (CM) is equal to the difference between total sales/Sales Revenue(S) and total variable cost. • In other words, it is the amount by which total sales/Sales Revenue(S) exceed total variable costs (VC). • In order to make profit, the contribution margin of a business must exceed its total fixed costs. • Formula to calculate Contribution Margin is as follows: Contribution Margin(CM) = Sales Revenue(S) – Total Variable Cost (VC) Contribution Margin Per Unit • Contribution Margin can also be calculated per unit which is called Contribution Margin per unit. • It is the excess of sales price per unit (p) over variable cost per unit (v). • Thus, that sales price per unit minus variable cost per unit is the contribution margin per unit. • CM per unit = selling price per unit(p) – Variable Cost per unit(v) Margin of Safety • Margin of safety is the difference between actual sales (S) and breakeven point. • That is, any revenue that takes your business above break-even point can be considered as the margin of safety. • This is once you have considered all the fixed and variable costs that the company must pay. • It can be calculated by using the following formula: • Method – 1: Margin of Safety = Total Sales(S) – Break Even Sales • Method – 2: Contribution Margin and CM/unit • Formula to calculate Contribution Margin – Contribution Margin(CM) = Total Sales(S) – Total Variable Cost (VC). Formula to calculate Contribution Margin per unit CM per unit = selling price per unit(p) – Variable Cost per unit(v) Margin of Safety • Method – 1: Margin of Safety = Total Sales – Break Even Sales • Method – 2: • Formula to calculate profit = Total Revenue – Total Cost Profit = Rs. 1,20,000,00 - Rs. 80,000,00
= Rs. 40,000,00.
Margin of Safety = Rs, (40,000,00 / Rs. 60,000,00) X 1,20,000,00
= Rs. 80,000,00.
