BREAK EVEN ANALYSIS

MEANING OF COSTS

Costs refer to the expenditure

incurred to produce a particular
product or service.
All costs involve a sacrifice of some
kind or the other to acquire a benefit.
The cost of production includes the
cost of raw materials, labour & other
expenses.

Cost concepts:

Fixed costs:
These costs that do not
vary with output.
Before a Firm starts
producing, it needs to
spent on plant, M/C,
fittings, equipments,
In fact, the firm has to
bear these costs even if
there is no output.

Cost Concepts:

Variable Costs:
The costs that vary with
volume of output and the
costs are incurred in
getting more &more inputs.
Eg: cost of Raw materials,
wages etc.,
It is otherwise called as
primary cost of production.

Cost concepts

Marginal Costs:
The addition made to the total cost
by the production of one additional
unit of output.
This means marginal cost is the
addition to the total cost of
producing n units instead of n-1
units where n is any given number.

Revenue concept

Total Revenue:
Total Revenue is the total
amount of money received
by a firm from goods sold
during a certain time
period.
TR=Q.P
Where Q is the quantity sold
and P is the price per unit.

BREAK EVEN ANALYSIS

An important application of cost

analysis used frequently in businesses
is Break even analysis.
It examines the relation between total
revenue, total costs and total profits of
a firm at different levels of output.
It is determining profit at various
projected levels of sales, identifying
the breakeven point.

BEA

Break-even analysis refers to analysis of the

break even point (BEP)
The BEP is defined as a no-profit or no-loss
point.
It is necessary to determine the BEP,
because it denotes the minimum volume of
production to be undertaken to avoid
losses.
In other words, how much minimum is to be
produced to see the profits.

BEA

Break-even analysis is defined as of

costs and their possible impact on
revenues and volume of the firm.
It is also cost-volume-profit analysis.
A firm is said to attain the BEP when
its total revenue is equal to Total
cost.(TR=TC).
TC=FC+VC

From the diagram we understand:

TC=Total Variable cost (TVC)+ Total Fixed

cost (TFC)
The variable cost line is drawn first. It
varies proportionately with volume of
production and sales.
The total cost line is derived by adding
total fixed costs line to the total variable
cost line.
The total revenue line starts from 0 point
and increases along with volume of sales
intersecting total cost line at point BEP

From the Diagram.

The zone below BEP is loss zone and

the zone above BEP is profit zone.
The point (E) where the revenue line
crosses the total cost line is the
break even point.

Assumptions underlying BreakEven Analysis

Costs can perfectly be classified into fixed

and variable costs.
Selling price does not change with volume
changes. It remains fixed. It does not
consider the price discounts or cash
discounts.
All the goods produced are sold. There is no
closing stock.
There is only one product available for sale.

Significance of BEA

To ascertain the profit on a particular

level of sales volume or a given capacity
of production.
To calculate the sales required to earn a
particular desired level of profit
to compare the efficiency of different
firms
To compare the product lines, sales area,
methods of sale for individual company.

BEA

It is significance for economic research,

business decision making, company
management, investment analysis and
public policy.
It is an important technique to trace the
relationship between costs, revenue and
profits at the varying levels of output or
sales.
It provides an important bridge between
business behaviour and economic theory
of the firm.

Limitations of BEA

BEP is based on fixed cost, variable

cost & total revenue. A change in one
variable is going to affect the BEP.
Where the business conditions are
volatile, BEP cannot give stable
results.