A STUDY ON BREAK EVEN ANALYSI OF A FIRM.

A Mini Project Report submitted as per the requirement of the curriculum for the partial fulfillment for the award of the degree of Master of business Administration (MB

Submitted by:

Yogesh R 58

Submitted to:

Prof. S.Guru basava Aradhya

Professor Managerial Economics

RNSIT MBA Department

RECEIVED

MARKS

COMMENTS

FACULTY ON

DOMAIN

SOFT SKILLS

Project given on

: 11 October 2011

Submission Date

: 15 December 2011

Actual Submission

: 15 December 2011

TABLE OF CONTENTS

Chapter 1

- Introduction--------------------------------------------------------4 *Abstract----------------------------------------*Objectives--------------------------------------4 5

- Methodology--------------------------------------------------- 5 *Primary Data---------------------------------------------5 *Secondary Data------------------------------------------5 - Limitation--------------------------------------------------------10

Chapter 2

- Conceptual Relevance -------------------------------------------6

Chapter 3

- Analysis and Interpretation-------------------------------------6

Chapter 4

- Findings-----------------------------------------------------------7 - Suggestions-------------------------------------------------------8 - Conclusion--------------------------------------------------------11

Annexure

- Bibliography--------------------------------------------------------20 - Websites-------------------------------------------------------------20

INTRODUCTION

Break Even Analysis

It is a widely used technique to study the cost -volume profit relationship. The narrower interpretation of term break even analysis refers to system of determination of that level of activity where total cost equals total selling price. The broader interpretation refers to that system of analysis which determines probable profit at any level of activity. It portrays the relationship between the cost of production, volume of production and sales value. Break even analysis indicates the level of sales at which cost and revenue are in equilibrium .The equilibrium point is commonly known as break even point, The break even point is that point of sales volume at which total revenue is equal to total cost.

Utility of Break Even Analysis:

It is the most useful technique of profit planning and control. It is a device to explain the relationship between the cost volume profit .The utility of break even analysis lies in the following advantages:

1) Provided detailed and understandable information: Break even analysis is a simple concept to present and interpret accounting data. Many business executives and other are unable to understand accounting data contained in the financial statements and reports but break even charts visualizes information very clearly and a look at a glance shall give a vivid picture of whole affairs. The different elements of cost direct material, direct labour, overheads (factory, office and selling etc) can be presented through an analytical break even chart. Further the information is in a simple format therefore it is clearly understandable even to layman.

2) Profitability of product and business can be known: The profitability of different can be known with the help of break even chart, besides the level no profit no loss .The problem of managerial decision regarding temporary or permanent shutdown of business or continuation at a loss can be solved by break even analysis .It is thus provides the basis information for profit improvement studies and it is useful starting point for the detailed investigation.

3) Effects of changing of cost and sales price can be demonstrated: The effect of changes of fixed and variable cost at different level of production on profits can be demonstrated by graph legibly. In other words relationship of cost, volume, profit at different level of activity and varying selling prices is shown through chart. Thus it studied requisites for survival of the company.

4) Cost control can be analyzed: The relative importance of fixed in the total cost of product can be analyzed and if the total cost are high, they can be controlled by the management. Thus it is a managerial tool for control and reduction of cost, elimination of wastages and achieving better efficiency.

5) Economy and efficiency can be affected: The capacity can be utilized to fullest possible extent and economies of scale and capacity utilization can be affected. Comparative plant efficiency can be studied on break even chart. The efficiency of output is indicated by the angle of incidence formed at intersection of sales line and the variable cost.

6) Diagnostic tool: It is useful diagnostic tool. It indicates to management the cause of increasing break even point and falling profit the analysis of these causes will reveal that what action should be taken. If break even point as a percentage of capacity is increasing, it indicates the unfavorable condition and need immediate action .It is possible that due to plant expansion absolute break even point may increase. This situation where break even point as a percentage of capacity may does not increase, is not unfavorable

Analysis and Interpretation

The formula: Don't worry, it's fairly simple. To conduct your breakeven analysis, take your fixed costs, divided by your price, minus your variable costs. As an equation, this is defined as: Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs) This calculation will let you know how many units of a product you'll need to sell to break even. Once you've reached that point, you've recovered all costs associated with producing your product (both variable and fixed). Above the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation, this is defined as: The graphic method of analysis (below) helps you in understanding the concept of the break-even point. However, the break-even point is found faster and more accurately with the following formula: Q = FC / (UP - VC) where:

Q = Break-even Point, i.e., Units of production (Q), FC = Fixed Costs, VC = Variable Costs per Unit UP = Unit Price Therefore, Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)

Break-Even Point in Units =

Total Fixed Costs

Selling Price per Unit Variable Costs per Unit Calculating break-even:

Please note that the figures used in these examples are purely hypothetical. If you are planning a business similar to one of the examples, please do not use these figures as an industry standard. You need to do your own research to find real, market-related figures. The function of the figures used here is purely to further explain the concept of break-even.

A service business Lets take a barbershop and lets suppose the overheads of the business are something like this: Owners salary Rental Fixed wages Cleaning services Electricity Telephone Magazine subscriptions Repairs and maintenance Security Bookkeeping Total overheads R250 R450 R650 R32 640 R7 500 R7 000 R750 R450 R500 R90 R15 000

In other words, the fixed costs or indirect costs are Rs 32,640 per month. The business will spend this amount even if it doesnt get a single client. What about the direct costs (variable costs or cost-of-sales)? How much does the business spend every time a client walks in an has his hair cut? Its a service business, so direct costs are usually low. Lets say it looks like this: Consumables (hair gel etc) Barbers commission Total direct cost per sale R5 R10 R15

The going rate for a hair-cut in the area is R70, and the business owner decides, wisely, to stick to the going rate.

What is his break-even point?

Step 1: Work out the gross profit per sale Gross profit per sale = sales price cost-of-sale Therefore Gross profit per sale = R55

Step 2: Work out the gross profit percentage Gross profit/sales x 100 = gross profit percentage

R55/R70 x 100 = 79%

Step 3: Work out the break-even point Breakeven = overheads/gross profit percentage Therefore Breakeven = R32 640/0,5 = R41 316 The barbershop therefore has to do R65 280s worth of hair-cuts a month to break even. That represents about 590 clients a month, because R65 280/R70 = 590 per month, or 26 clients a day.

Limitations of Break-Even Analysis

Although, break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be considered:

All costs resolved into fixed or variable Variable costs fluctuate in direct proportion to volume. Fixed costs remain constant over the volume range. The selling price per unit is constant over the entire volume range. The company sells only one product, or mix of products tends to remain constant. Volumetric increase is the only factor affecting costs. The efficiency in the use of resources will remain constant over the period.

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CONCLUSION Break-even analysis is only a supply side (costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices. It assumes that fixed costs (FC) are constant It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period. In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant.

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