Computation of The Break

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.
(a) 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:
(b) Break-even Point in terms of budget-total or money

value:
(c) 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. For example, if a firm has an estimated capacity of
1,00,000 units of products and its break-even point is reached at
50,000 units, then the break-even point is at 50% of capacity
(1,00,000/50,000).
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
Illustration 1:
From the following information, calculate the break-even
point in units and in sales value:
Output = 3,000 units
Selling price per unit = Rs. 30
Variable cost per unit =Rs. 20
Total fixed cost = Rs. 20,000
Solution:

4. 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
Illustration 2:
From the following information, calculate the cash Break-
Even Point:
Solution:
(ii) Composite Break-Even Point:
So far we have dealt with break-even point of firms
producing single product. We can also calculate the
composite break-even point for a firm producing several
products, as below:
Composite Break-Even Point (in Sales value) = Total Fixed
Cost/Composite P/V Ratio
and, Composite P/V Ratio = Total Contribution/Total Sales × 100
Illustration 3:
From the following information of a company producing
three products, you are required to compute:
(a) Composite P/V Ratio, and
(b) Composite Break-Even Point.
Fixed costs: Rs. 50,000.
Solution:
5. Graphic Method of Break-Even Analysis:
The break-even point can also be computed graphically. A break-
even chart is a graphical representation of marginal costing. The
break-even chart ‘Portrays a pictorial view of the relationships
between costs, volume and profits.’
It shows the break-even point and also indicates the estimated

profit or loss at various levels of output. The break-even point as
“indicated in the chart is the point at which the total cost line and
the total sales line intersect.
There are three methods of drawing a break-even chart. These

methods of drawing break-even chart have been explained with the
help to the following illustration.
Illustration 4:
Plot the following data on a graph (break-even chart) and
determine:
(a) Break-even point
(b) Profit if the output is 25,000 units.

Solution:
First Method:
Under this method following steps are taken to draw the
break-even chart:
i. Volume of production/output or sales is plotted on horizontal
axis, i.e., X-axis. The volume of sales or production may be
expressed in terms of rupees, units or as a percentage of capacity.
ii. Costs and sales revenue are represented on vertical axis, i.e., Y-
axis.
iii. Fixed cost line is drawn parallel to X-axis. The line indicates that
fixed expenses remain constant at all levels of activity.
iv. The variable costs for different levels of activity are plotted over-
the fixed cost line. The variable cost line is joined to fixed cost line
at zero level of activity. As the variable cost line is drawn above the
fixed cost line, it represents the total cost at various levels of
output/sales.
v. Sales values at various levels of output are plotted and a line is
drawn joining these plotted points. This line is called the sales
(revenue) line.
vi. The point of intersection of total cost line and sales (revenue)
line is called the break-even point.
vii. The number of units to be produced at break-even point can be

determined by drawing a perpendicular to the X-axis from the point
of intersection of cost and sales line.
viii. The sales revenue at break-even point can be determined by

drawing a perpendicular to the X- axis from the point of inter-
section of cost and sales line.
ix. The area below the break-even point represents the loss area as
the total sales and less than the total cost and the area above the
break-even point indicates the area of profit as the sales revenue
exceeds the total cost.
Second Method:
The break-even chart can also be drawn by another method which is
a variation of the first method. Under this method, the variable cost
line is drawn first and then fixed cost line is drawn over and parallel
to le variable cost line. The fixed cost line, so drawn, represents the
total cost (Variable + Fixed) at various levels of output because it is
drawn above the variable cost line.
This method is useful to the management for decision

taking because it reveals additional information:
(a) The variable costs are shown directly for various levels of
output/sales.
(b) Marginal contribution at various levels of sales is indicated

clearly by the difference between sales line and variable cost line.
(c) It indicates the recovery of fixed costs at various levels of

production.
A small variation of this method is that of showing the various
elements of fixed and variable costs, for example, major cost
elements such as direct material cost, labour cost, variable factory
overhead cost, variable selling overhead and fixed costs.
Third Method—Contribution Break-even Chart:

This is a modified form of a simple break-even chart as shown in the
first-two methods above. Under this method total cost line is not
drawn, rather another line called contribution line is drawn from
the origin and this line goes up with the increase in the level of
output. The fixed cost line is drawn parallel to the x-axis as in the
first method.
The sales line is also drawn as usual. In this method, the question of
intersection of sales line with the total cost line does not arise
because there is no cost line. The break-even point is that point
where the contribution line crosses the fixed cost line. At this point,
total contribution is equal to the total fixed cost and hence there is
no profit or loss.
As the contribution increases more than the fixed cost, profit shall
arise to the organisation and as contribution decreases from the
fixed cost, there shall be loss to the organisation. The contribution
break-even chart shows clearly contribution at different levels of
activity and indicates that all levels below the break-even point are
unable to cover the fixed costs.
In the above example, at level of output/sales of 25,000 units, there
is a profit of Rs. 50,000 as indicated by the break-even charts under
the three methods.
Break-Even Analysis: Problem with Solution # 1.

From the following particulars, calculate:
(i) Break-even point in terms of sales value and in units.
ADVERTISEMENTS:
(ii) Number of units that must be sold to earn a profit of Rs. 90,000.
Solution:

ADVERTISEMENTS:
From the following data, you are required to calculate:

(a) P/V ratio
(b) Break-even sales with the help of P/V ratio.
ADVERTISEMENTS:
(c) Sales required to earn a profit of Rs. 4,50,000
Fixed Expenses = Rs. 90,000
Variable Cost per unit:
Direct Material = Rs. 5
ADVERTISEMENTS:
Direct Labour = Rs. 2
Direct Overheads = 100% of Direct Labour
Selling Price per unit = Rs. 12.
Solution:

From the following data, you are required to calculate
break-even point and net sales value at this point:
If sales are 10% and 25% above the break even volume, determine
the net profits.
ADVERTISEMENTS:
Solution:

ADVERTISEMENTS:
From the following particulars, find out the break-even-

point:
What should be the selling price per unit, if the break-even point
should be brought down to 6,000 units?
Solution:

ADVERTISEMENTS:
The fixed costs amount to Rs. 50,000 and the percentage of variable
costs to sales is given to be 66 ⅔%.
If 100% capacity sales are Rs. 3,00,000, find out the

break-even point and the percentage sales when it
occurred. Determine profit at 80% capacity:
Solution:

From the following information, ascertain by how much
the value of sales must be increased by the company to
break-even:
Solution:

Calculate:
(i) The amount of fixed expenses.
(ii) The number of units to break-even.

(iii) The number of units to earn a profit of Rs. 40,000.
The selling price per unit can be assumed at Rs. 100.
The company sold in two successive periods 7,000 units and 9,000
units and has incurred a loss of Rs. 10,000 and earned Rs. 10,000
as profit respectively.
Solution:

A company is making a loss of Rs. 40,000 and relevant
information is as follows:
Sales Rs. 1,20,000; Variable Costs Rs. 60,000; Fixed costs Rs.
1,00,000.
Loss can be made good either by increasing the sales price or by
increasing sales volume. What are Break even sales if
(a) Present sales level is maintained and the selling price is

increased.
(b) If present selling price is maintained and the sales volume is

increased. What would be sales if a profit of Rs. 1,00,000 is
required ?
Solution:

Computation of The Break

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Computation of the Break-Even Point:

The break-even point can be computed by the following

(ii) Graphic or Chart Method.

Algebraic Formula Method for Computing the Break-Even

(b) Budget total or in terms of money value.

(c) As a percentage of estimated capacity.

(a) Break-Even Point in Units:

(b) Break-even Point in terms of budget-total or money

(c) Break-even Point as a percentage of estimated

If information as to total contribution at full capacity is

Selling price per unit = Rs. 30

Variable cost per unit =Rs. 20

Total fixed cost = Rs. 20,000

4. Types of Break-Even Point:

At this point, cash contribution (which is calculated after making

Thus, cash break-even point may be calculated as below:

and, Composite P/V Ratio = Total Contribution/Total Sales × 100

(b) Composite Break-Even Point.

Fixed costs: Rs. 50,000.

It shows the break-even point and also indicates the estimated

There are three methods of drawing a break-even chart. These

(b) Profit if the output is 25,000 units.

vii. The number of units to be produced at break-even point can be

viii. The sales revenue at break-even point can be determined by

This method is useful to the management for decision

(b) Marginal contribution at various levels of sales is indicated

(c) It indicates the recovery of fixed costs at various levels of

Third Method—Contribution Break-even Chart:

Break-Even Analysis: Problem with Solution # 1.

From the following data, you are required to calculate:

(b) Break-even sales with the help of P/V ratio.

(c) Sales required to earn a profit of Rs. 4,50,000

Fixed Expenses = Rs. 90,000

Variable Cost per unit:

Direct Material = Rs. 5

Direct Labour = Rs. 2

Direct Overheads = 100% of Direct Labour

Selling Price per unit = Rs. 12.

From the following particulars, find out the break-even-

If 100% capacity sales are Rs. 3,00,000, find out the

(ii) The number of units to break-even.

The selling price per unit can be assumed at Rs. 100.

(a) Present sales level is maintained and the selling price is

(b) If present selling price is maintained and the sales volume is

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