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    Breakeven Analysis

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    rameshpersonal2000
    This document discusses breakeven analysis, which determines the point at which total revenue equals total costs. It defines breakeven point and explains its importance for determining startup costs, pricing, and sales needed to cover costs. It also covers calculating breakeven using the equation method, considering factors like fixed/variable costs. Graphical and example calculations are presented.

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    Breakeven Analysis

    Uploaded by

    rameshpersonal2000
    127 views30 pages
    This document discusses breakeven analysis, which determines the point at which total revenue equals total costs. It defines breakeven point and explains its importance for determining startup costs, pricing, and sales needed to cover costs. It also covers calculating breakeven using the equation method, considering factors like fixed/variable costs. Graphical and example calculations are presented.

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    Break Even Analysis

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    This document discusses breakeven analysis, which determines the point at which total revenue equals total costs. It defines breakeven point and explains its importance for determining startup costs, pricing, and sales needed to cover costs. It also covers calculating breakeven using the equation method, considering factors like fixed/variable costs. Graphical and example calculations are presented.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    127 views30 pages

    Breakeven Analysis

    Uploaded by

    rameshpersonal2000
    This document discusses breakeven analysis, which determines the point at which total revenue equals total costs. It defines breakeven point and explains its importance for determining startup costs, pricing, and sales needed to cover costs. It also covers calculating breakeven using the equation method, considering factors like fixed/variable costs. Graphical and example calculations are presented.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 30

    TABLE OF CONTENT

    • DEFINITION
    • IMPORTANCE OF BREAKEVEN POINT
    • FACTORS TO BE CONSIDERED IN THE BEP
    ANALYSIS
    • CALCULATION OF BREAKEVEN POINT
     THE CALCULATION METHOD

     THE GRAPHICAL METHOD


    DEFINITION

    • Breakeven analysis is the business analysis


    performed to determine the probable point
    when your business will be able to cover all its
    expenses and begin to make a profit.
    Breakeven analysis can be done to determine
    either the breakeven point or the breakeven
    volume.
    BREAKEVEN POINT

    • It is the point in your business transactions


    when profit is exactly equal to the costs of
    doing business. It is the point that above it,
    the business starts making profit (revenue
    exceeds costs), all factors remaining constant.
    At the breakeven point: TOTAL REVENUE =
    TOTAL COST
    PERSPECTIVES
    • Breakeven point can be determined in terms of:

    • Time - how long will you be in business to be able to start making profit?

    • Units of sales – how many units of your product will you will be able to sell
    before making profit?

    • Sales revenue – how much revenue do you need to generate to start


    making profit?

    • NOTE: (1) All three perspectives are inter-related, therefore, the choice of
    which metric- time, units of sales, or sales volume – to adopt is personal.

    • (2) Breakeven point can be defined from the standpoint of each of


    these perspectives.
    IMPORTANCE OF BEP ANALYSIS
    • It helps to identify your start-up costs

    • It also helps to determine the sales revenue needed to pay for


    ongoing business expenses.

    • Breakeven point analysis helps the business to determine its gross


    (or contribution) margin

    • Breakeven point analysis aids in developing proper product pricing


    strategy through knowledge of its gross margin.

    • The breakeven point is an important reference point that enters


    into planning and carrying out business activities.

    • A clear understanding of the sales volume needed to cover all


    costs (mentioned in point 2 above) helps the business to know:
    IMPORTANCE OF BEP ANALYSIS

    • How many units the business must produce and sell in terms of
    manufacturing business

    • How many units to purchase and sell in the case of the merchandising
    business

    • In the services unit, the breakeven point indicates the number of billable
    hours you must work in order to cover your costs.

    • It helps in examining the effects of on-going business processes or


    activities on the organization’s profitability.

    • It helps in deciding about the substitution of new plants (and products).

    • It is an essential component of a business or marketing plan, and is


    normally incorporated in the feasibility studies.
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    FACTORS TO BE CONSIDERED IN THE BEP ANALYSIS
    CALCULATION OF BREAKEVEN
    POINT
    To calculate the breakeven point,
    • You will need to identify your fixed and
    variable costs. 

    BASIC FORMULA:
    • Breakeven point = fixed costs/ (unit selling
    price – variable costs).
    CALCULATION OF BREAKEVEN
    POINT
    • REMEMBER:
    AT BREAKEVEN POINT:
    PROFIT = 0
    LOSS = 0
    PROFIT = LOSS
    Revenues of the business are equal to its total
    costs and its contribution margin equals its
    total fixed costs.
    CALCULATION OF BREAKEVEN
    POINT
    • TWO METHODS OF CALCULATING BREAKEVEN
    POINT –

    1. THE EQUATION OR THE CONTRIBUTION METHOD

    2. THE GRAPHICAL METHOD


    THE EQUATION METHOD

    • This is based on the cost-volume-profit


    (CVP) formula:

    • px = vx + FC + Profit
    Where,
    p is the price per unit,
    x is the number of units,
    v is variable cost per unit and
    FC is total fixed cost.
    Calculation

    BEP in Sales Units


    • At break-even point the profit is zero
    therefore the CVP formula is simplified to:
    px = vx + FC
    • Solving the above equation for x which equals
    break-even point in sales units, we get:
    Break-even Sales Units = x =FC
    p−v
    CALCULATION

    BEP in Sales Dollars


    • Break-even point in number of sales dollars is
    calculated using the following formula:
    Break-even Sales Dollars = Price per Unit ×
    Break-even Sales Units
    CALCULATION

    EXAMPLE

    Calculate break-even point in sales units


    and sales dollars from following information:
    Price per Unit = $15
    Variable Cost per Unit = $7
    Total Fixed Cost = $9,000
    CALCULATION

    SOLUTION
    We have,
    p = $15
    v = $7, and
    FC = $9,000

    Substituting the known values into the formula for breakeven point
    in sales units, we get:

    Breakeven Point in Sales Units (x):


    = 9,000 ÷ (15 − 7)
    = 9,000 ÷ 8
    = 1,125 units

    Break-even Point in Sales Dollars = $15 × 1,125 = $16,875


    Cost Volume Profit Analysis
    (CVP)
    • Cost-Volume-Profit (CVP) analysis is a
    managerial accounting technique that is
    concerned with the effect of sales volume and
    product costs on operating profit of a
    business.
    • It deals with how operating profit is affected
    by changes in variable costs, fixed costs,
    selling price per unit and the sales mix of two
    or more different products.
    CVP ASSUMPTIONS

    • All cost can be categorized as variable or fixed.


    • SALES PRICE per unit, variable cost per unit
    and total fixed cost are constant.
    • All units produced are sold.
    • Where the problem involves mixed costs, they
    must be split into their fixed and variable
    component by High-Low Method, Scatter Plot
    Method or Regression Method.
    CVP Analysis Formula

    • The basic formula used in CVP Analysis is


    derived from profit equation:
    • px = vx + FC + Profit
    • In the above formula,
       p is price per unit;
       v is variable cost per unit;
       x are total number of units produced and
    sold; and
       FC is total fixed cost
    CONCEPTS ASSOCIATED WITH CVP

    • Contribution Margin (CM) – aka Gross Margin


    Contribution Margin (CM) is equal to the
    difference between total sales (S) and total
    variable cost or, in other words, it is the
    amount by which sales exceed total variable
    costs (VC). In order to make profit the
    contribution margin of a business must
    exceed its total fixed costs.
    In short: CM = S − VC
    CONCEPTS ASSOCIATED WITH CVP

    • Unit Contribution Margin (Unit CM)


    Contribution Margin can also be calculated per unit
    which is called Unit Contribution Margin. It is the excess
    of SALES PRICE per unit (p) over variable cost per unit (v).
    Thus:
    Unit CM = p − v
    • Contribution Margin Ratio (CM Ratio)

    Contribution Margin Ratio is calculated by dividing


    contribution margin by total sales or unit CM by price per
    unit.
    Contribution Approach Formulas
    • BEP in Sales Units
    We learned that, at break-even point, the CVP
    analysis equation is reduced to:
    px = vx + FC
    Where p is the price per unit, x is the number of units, 
    v is variable cost per unit, and
     FC is total fixed cost.
    Contribution Approach Formulas

    Solving the above equation for x (i.e. Break-even sales units):

    Break-even Sales Units = x = FC ÷ ( p − v )

    Since unit contribution margin (Unit CM) is equal to unit SALE


    PRICE (p) less unit variable cost (v), So,

    Unit CM = p − v

    Therefore,

    Break-even Sales Units = x = FC ÷ Unit CM


    Contribution Approach Formulas

    • BEP in Sales Dollars


    Break-even point in dollars can be calculated
    via:
    Break-even Sales Dollars = Price per Unit ×
    Break-even Sales Units ;
    or
    Break-even Sales Dollars = FC ÷ CM Ratio
    Contribution Approach Formulas
    EXAMPLE
    • Calculate the break-even point in units and in sales
    dollars when SALES PRICE per unit is $35, variable
    cost per unit is $28 and total fixed cost is $7,000.
    • Solution
    Contribution Margin per Unit = ( $35 − $28 ) = $7
    Break-even Point in Units = $7,000 ÷ $7 = 1,000
    Break-even Point in Sales Dollars = 1,000 × $35 or
    $7,000 ÷ 20% = $35,000
     

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