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Break Even Analysis(BEA)

It is necessary for a firm to plan its

profit. So it should understand the
relationship Of Cost, Price, and Profit.
The most important method of
determining is Break-Even Analysis.

Break Even Point = Total Revenue –

Total Cost
i.e No – Profit -- No loss Point
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Assumptions of Break-
Even Analysis
Fixed costs are constant,only
variable costs change.
The Firm produces only one product.
Selling price remains constant, does
not change with volume of scale.
Constant-technology
Costs and revenue change with
changes in sales volume
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Break-Even Analysis
Formula:-

Fixed costs
BEP=
Selling Price - Variable Costs per unit

Example:

•If Fixed costs= Rs10,000 Rs. 10,000

•Selling Price =Rs 5P.U BEP= ______________
•Variable Costs =Rs 3 P.U 5 -- 3

BEP = 5000 units

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 Diagram of Break Even Point
Y
TR
Revenue and Costs

Profits
TC
Break Even Point

TFC
Loss

X
0 Q Output
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 Diagram of Break Even Point
Y
TR
Revenue and Costs

Profits
TC
Break Even Point

TVC

TFC
Loss

X
0 Q Output
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Uses of Break – Even
Analysis
What happens to overall profitability when
a new product is introduced?
What level of sales is needed to cover all
costs and earn, say Rs 1,00,000 profit or a
12% rate of return?
What happens to revenues and costs if
the price of one of a company’s product is
hanged?
What happens to overall profitability if a
company purchases new capital
equipment or incurs higher or lower fixed
or variable costs? 7
Uses of Break – Even
Analysis
Between two alternative
investments which one offers the
greater margin of profit (safety)?
What are the revenue and cost
implication of changing the process
of production?
Should one make buy or lease
capital equipments?

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Advantages of break even analysis in
Managerial decision making

It helps in determining the optimum

level of output below which it would
not be profitable for a firm to produce
It helps in determining the target
capacity for a firm to get the benefit
of minimum unit cost of production.
The firm can determine minimum
cost for a given level of output.

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Advantages of break even analysis in
Managerial decision making

It helps the firm in deciding which

products are to be produced and
which are to be brought by the firm.
Plant expansion and contraction
decisions are often based on the
break even analysis of the perceived
situation.
Impact of changes in prices and
costs on profit of the firm can also be
analyzed with the help of break even
technique. 10
Advantages of break even analysis in
Managerial decision making

Sometimes a management has to

take decisions regarding dropping or
adding a product to the product line.
The break even analysis comes very
handy in such situation.
It evaluates the percentage financial
yield from a project and thereby
helps in the choice between various
alternatives projects
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Advantages of break even analysis in
Managerial decision making

The break even analysis can be

used in finding the selling price
which would prove most
profitable for the firm
By finding out the break even
point the break even analysis
helps in establishing point where
from the firm can start payment
of dividend to its shareholders 12