This document provides information about break even analysis including definitions of key terms like fixed cost, variable cost, selling price, break even point, contribution margin, and profit volume ratio. It also includes examples of break even analysis questions from past competitive exams. The document aims to explain the concept and calculations of break even analysis and how it can be used as a management decision making tool.

1. Aditya Pal
IIT DELHI
telegram channel: https://t.me/adi20pathshala
Mail ID: ap.aditya@gmail.com
Phone: 9799989202

2. BREAK EVEN ANALYSIS

3. • Total cost of a product is the sum of fixed cost &
variable cost.

5. • Fixed cost is that component of cost which the
company has to invest before it starts
manufacturing the product.
• Ex: land, M/C , Infrastructure.

6. • Variable cost is that component of the cost
that the company has to incur while
producing the goods. It is directly
proportional to the number of units being
produced by the company.
• Ex: raw material, labor, power consumption

7. • Fixed cost =F
• Variable cost/unit=V
• Selling price/unit=S
• number of unit being produce=Q
• total cost=F+VQ
• total revenue(TR)=SQ
• Profit=SQ-(F+VQ)
• At break even point profit=0

8. • TR=TC
SQx =F+VQx
Qx=F/(S-V)
Qx= QBE= Break even quantity
SQ>VQ
S>V
Break-Even Chart
Costs/Revenue
Output/Sales
FC
VC
TC
TR 1
Q1
BEP

9. Observation
• In this formula the term (S-V) is often called contribution margin.
• It is simply the per unit revenue-per unit variable cost.

10. Break-Even Chart
Costs/Revenue
Output/Sales
FC
VC
TC
TR1
Q1
TR2
BEP
Q2
BEP

11. • At break even point profit of the company is Zero,
• which means that the company operate on a NO Profit NO Loss
basis
• the company will earn profit if the sales increase beyond BEP.

12. • BEP is quit significant because if the company is operating at higher
level than its BEP then it can offer Price Cuts and Increase its market
share

13. Another Use OF
BEP

15. Sales= F+VQ+ P
Contribution =F+P
Contribution at BEP=?
Contribution: Contribution is the measure of
economic value that tells how much the sale of
one unit of the product will contribute to cover
fixed cost, with the remainder going to profit
Contribution = Sales – Total Variable Cost (Q.V)

16. Profit volume ratio or Margin of safety(%)
The margin of safety is simple the excess of actual
output over the break even output. In terms this is
simply the excess of sales revenue over the break-
even sales revenue.
Both Profit volume ratio & Contribution are indicator
of profitability
Actual sales – Break even sales X 100
Actual sales

17. IES-2000
Last year, a manufacturer produced 15000 products which were sold
for Rs. 300 each. At that volume, the fixed costs were Rs. 15.2 lacs
and total variable costs were Rs. 21 lacs. The break even quantity of
product would be:
(a) 4000
(b) 7800
(c) 8400
(d) 9500

18. IES-1996
Two alternative methods can produce a product first method has a
fixed cost of Rs. 2000/- and variable cost of Rs. 20/- per piece. The
second method has a fixed cost of Rs. 1500/- and a variable cost of
Rs. 30/-. The break even quantity between the two alternatives is:
(a) 25 (b) 50 (c) 75 (d) 100
Ans. (b) 2000 + 20n = 1500 + 30n, 10n = 500 and n = 50

19. IES-1995
For a small scale industry, the fixed cost per month is Rs. 5000/-.
The variable cost per product is Rs. 20/- and sales price is Rs. 30/-
per piece. The break-even production per month will be:
(a) 300 (b) 460 (c) 500 (d) 10000

20. IES-1997
Process I requires 20 units of fixed cost and 3 units of variable cost
per piece, while Process II required 50 units of fixed cost and 1 unit
of variable cost per piece. For a company producing 10 piece per day
(a) Process I should be chosen
(b) (b) Process II should be chosen
(c) Either of the two processes could be chosen
(d) A combination of process I and process II should be chosen

21. IES-2004
Process X has fixed cost of Rs. 40,000 and variable cost of Rs. 9 per
unit whereas process Y has fixed cost of Rs.16, 000 and variable cost
of Rs. 24 per unit. At what production quantity, the total cost of X
and Yare equal?
(a) 1200 units
(b) 1600 units
(c) 2000 units
(d) 2400 units

22. IES-2003
The indirect cost of a plant is Rs 4,00,000 per year. The direct cost is
Rs 20 per product. If the average revenue per product is Rs 60, the
break-even point is:
(a) 10000 products (b) 20000 products
(c) 40000 products (d) 60000 products
(

23. IES-2007
If the fixed cost of the assets for a given period doubles, then how
much will the break-even quantity become?
(a) Half the original value
(b) Same as the original value
(c) Twice the original value
(d) Four times the original value

24. IES-2009
Consider the following statements:
The break-even point increases
1. If the fixed cost per unit increases
2. If the variable cost per unit decreases
3. If the selling price per unit decreases
Which of the above statements is/are correct?
(a) 1 only (b) 1 and 2 (c) 2 and 3 (d) 1 and 3

25. Based on the given graph, the economic
range of batch sizes to be preferred for
general purpose machine (OP), NC
machine (NC) and special purpose
machine (SP) will be:
Codes:
GP NC SP
(a) 2 5 4
(b) 1 4 5
(c) 3 2 4
(d) 1 4 2

26. IES-1997
Assertion (A): A larger margin of safety in break-even analysis is
helpful for management decision.
Reason (R): If the margin of safety is large, it would indicate that there will be
profit even when there is a serious drop in production.
(a) Both A and R are individually true and R is the correct explanation of A
(b) Both A and R are individually true but R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true

27. IES-1994
Match List-I (Element of cost) with List-II (Nature of cost) and select
the correct answer using the codes given below the lists:
List-I List-II
A. Interest on capital 1. Variable
B. Direct labour 2. Semi-variable
C. Water and electricity 3. Fixed
Codes: A B C A B C
(a) 3 1 2 (b) 2 1 3
(c) 3 2 1 (d) 2 3 1