Break - even analysis

Formulas :

Total cost = Fixed costs + Variable costs

TC = FC+VC
Total revenue (TR) = Selling price per unit x number of units sold.
Profit = Total revenue Total cost (fixed cost + variable cost)
Profit = TR TC
Break even point in terms of sales value (Rs.)
Total Fixed cost
= -------------------------------------------BEP(Rs)
Total revenue Total variable cost
Break even point in terms of quantity (units)
Q

x Selling price

Total Fixed cost

Q
= -------------------------------------------------------------BEP(units)
{Selling price per unit} Variable cost per unit

Margin of safety = Actual (Budgeted) sales Sales at B.E.P.

Profit volume ratio (P/V ratio)
contribution
P/V ratio = ------------------------ x 100
Total sales revenue
Change in profit
P/V ratio= ---------------------Change in sales

Change in contribution
P/V ratio = ----------------------------Change in sales
Contribution = [Selling price per unit Variable cost per unit]
Contribution = [Fixed cost per unit + Profit per unit ]

Limitations of Break Even Analysis

1. The analysis is based on fixed costs, variable costs and total revenue. Any change in one
variable affects break even point.
2. Semivariable costs and depreciation are not accounted which is significant in any
manufacturing firm.
3. Multiple charts are to be produced in case of multi product firm.

4. The effect of technological development, managerial effectiveness also determines

profitability. These factors are not considered in break - even chart.
5. The break even chart is based on fixed cost concept and hence holds good for a short
period.
6. Break even analysis is not suitable under fluctuating business environment.
Problems
1. If sales is 10,000 units and selling price is Rs.20 per unit, variable cost Rs.10 per unit and
fixed cost is Rs.80,000. Find out BEP in units and in sales revenue. What is profit
earned ? what should be the sales for earning a profit of Rs.60,000?.
2. The PV ratio of Matrix books Ltd. Is 40% and margin of safety is 30%. You are required
to workout the BEP and Net profit if the sales volume is Rs.14,000/3. Sale of a product amounts to 20 units per month Rs. 10 per unit. Fixed overheads are
Rs.400 per month and variable cost is Rs. 6 per unit. There is a proposal to reduce prices
by 10%. Calculate present and future PV ratio.
4. Sale of rs. 1,10,000 producing a profit of Rs.4000 in period-1. Sales of Rs.1,50,000
producing a profit of Rs.12,000 in period-11. Determine BEP and fixed expenses
5. A concern is manufacturing a product which is sold for Rs.10.50 per unit and the fixed
cost of assets is Rs.50,000 with a variable cost of Rs.6.50 per unit. How many units must
be produced to break-even? How many units must be produced to earn profit of
Rs.10,000? What would be the profit for sales volume of 20,000 units ?
6. A gear manufacturing company sells gears at a selling price of Rs.250 per unit. The
company cost commitment at Rs.20 lakhs and variable cost of Rs.125/- per unit calculate
a) Break even sales quantity
b) Break even sales
c) Contribution
d) Margin of safety if actual production quantity is 60,000 units.