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Õ Origins in the economic concept of the "  


 ´

Õ `reak even can be expressed in terms of:


-Value
-Time
-Quantity
m m

The point where sales


or revenue will equal
expenses and there is no
profit made or
loss incurred at that point

Õ §t which sales will equal costs
Õ §t which income matches expenditure.
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  m 
Õ mmportant who manages a business

Õ Powerful quantitative tool for managers

Õ Starting of `usiness

ÕManagers can use this information



  m 
M 
Õ mt is a point where sales revenue equals the costs to make and
sell the product and no profit or loss is reported.

Õ The `reak Even Point of a company or a unit of a company is


the level of sales income which will equal to the sum of its fixed
cost and variable costs.

Õ The `reak Even Point is that point of activity (sales volume)


where total revenues and total expenses are equal, it is the point of
zero profit and zero loss.
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Õ mn the linear Cost-Volume-Profit §nalysis model, the ë
 
  (in terms of Unit Sales (X)) can be directly computed in
terms of Total Revenue (TR) and Total Costs (TC) as:
TR=TC
P  X = TFC + V  X
P  X ± V  X = TFC
( P ± V )  X = TFC
X = TFC
P-V
where:
Õ   is  
  ,
Õ Y is ë
Y , and
Õ 0 is ë0

ë .
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Õ The break-even point can be more simply computed as the
point where Total Contribution = Total Fixed Cost:

ë 

ëëë 
 ë
 

ë 
 ë 

ëë
Õmn currency units (sales proceeds) to reach break-even, one
can use the above calculation and multiply by Price, or
equivalently use the Contribution Margin Ratio (Unit
Contribution Margin over Price) to compute it as


 
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Y
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Õ `reak-even analysis is only a supply side (ë  costs only) analysis.

Õ mt assumes that fixed costs (FC) are constant. §lthough, this is true
in the short run, an increase in the scale of production is likely to
cause fixed costs to rise.

Õ mt assumes average variable costs are constant per unit of output,


at least in the range of likely quantities of sales. (ë  linearity)

Õ mt assumes that the quantity of goods produced is equal to the


quantity of goods sold .

Õ mn multi-product companies, it assumes that the relative


proportions of each product sold and produced are constant
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 m

Õ Expenses can be classified as either variable or fixed

Õ CVP relationships are linear over a wide range of production


and sales

Õ Sales prices, unit variable cost, and total fixed expenses will
not vary within the relevant range
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Õ Volume is the only cost driver

Õ The relevant range of volume is specified

Õ mnventory levels will be unchanged

Õ The sales mix remains unchanged during the period


  m
Õ Remember:

Õ § higher price or lower price does not mean that


break even will   be reached!

ÕThe break even point depends on the number of sales


needed to generate revenue to cover costs ± the break
even chart is NOT time related!
Õ mmportance of Price Elasticity of Demand:

Õ Higher prices might mean fewer sales to break even


but those sales may take a longer time to achieve

Õ Lower prices might encourage more customers but


higher volume needed before sufficient revenue
generated to break even
  ë
   



 

Õ Penetration pricing ± µhigh¶ volume, µlow¶ price ±


more sales to break even

Õ Market Skimming ± µhigh¶ price µlow¶ volumes ±


fewer sales to break even

Õ Elasticity ± what is likely to happen to sales when


prices are increased or decreased?
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MARGIN OF SAFETY
â M 
 The quantity of units produced (or sales of these units)
which are above the breakeven point is known as MOS

§((
0 Excess of actual sales revenue over the breakeven sales revenue,
expressed usually as a percentage. The greater this margin, the
less sensitive the firm to any abrupt fall in revenue. Formula:
(§ctual sales revenue - `reakeven sales revenue) x 100 ÷ §ctual
sales revenue.
w 
0  

The Margin of Safety is the difference between
actual sales and sales at break even point

0 V  
Margin of safety = §ctual Sales ± Sales at `ep
V
 
Ë Suppose the Sales of XYZ ltd,is 1,20,000 units
and the sales at `ep is 90,000 units, then
M/S=1,20,000units-90,000units = 30,000units

Ë    ()( 1


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0 Higher Margin of Safety Provides greater protection to the
company. The size of Margin of safety is an indicator of
soundness of business
0 mt shows how much sales will decrease before the firm will
suffer the loss
0 Sales beyond the `reak Even Point represent margin of
Safety
0 Larger the Margin of Safety, Greater the soundness of
business and Vice-Versa«
    
1. mncrease the level of production
2. Reduce the Fixed and/ or Variable cost
3. mncrease the Selling Price
4. Substitute the existing product with more profitable
products
5. From the product mix, remove the product whose
contribution ratio is very low

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