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Submitted by: Submitted to:Arun Bhatt Mr. Anil sirClass : BBA Part IRoll No. :05
CONTENTSBreak even pointIntroduction to break even analysisBreak even calculatorComponents of break even analysisUsesLimitationsConclusion
WHAT IS A BREAK EVENPOINT?In economics & business, specifically cost accounting, the break-evenpoint (BEP) is the point at which cost or expenses and revenue are equal:there is no net loss or gain, and one has "broken even". A profit or a losshas not been made, although opportunity costs have been paid, and capitalhas received the risk-adjusted, expected return. break even point) Breakeven Point is desired by all firms who wish to make abnormal profit, overand above all costs. It is shown graphically, at the point where the totalrevenue and total cost curves meet.
A breakeven analysis is used to determine howmuch sales volume our business needs to startmaking a profit.The breakeven analysis is especially useful when weare developing a pricing strategy, either as part of amarketing plan or a business plan.
Fixed Cost:The sum of all costs required to produce the firstunit of a product. This amount does not vary asproduction increases or decreases, until new capitalexpenditures are needed.
Total Revenue:The product of expected unit sales and unit price.(Expected Unit Sales * Unit Price )Profit (or Loss):The monetary gain (or loss) resulting fromrevenues after subtracting all associated costs.(Total Revenue - Total Costs)
The Break-Costs/Revenue TR The output isthe As revenue is Totallowercosts eventotal by the The point TR TC determined the generated, firm Initially a therefore less VC occurs where price,will incur the firm charged and price incur fixed will (assuming total revenue steep thecosts – – variable total costs, these do the quantity sold accuratetotal equals will be thesethis not vary revenue curve. again depend on costs – the the forecasts!) is directly or bythe output with determined sales. firm,of FC+VC sum in this expected produced amount forecast example sales initially. would have to sell Q1 to generate sufficient revenue to FC cover its costs. Q1 Output/Sales
Helpful in deciding the minimum quantity ofsalesHelpful in the determination of tender priceHelpful in examining effects uponorganization’s profitabilityHelpful in deciding about the substitution ofnew plantsHelpful in sales price and quantityHelpful in determining marginal cost
It assumes that fixed costs (FC) are constantIt assumes average variable costs are constant per unit of output, atleast in the range of likely quantities of sales.It assumes that the quantity of goods produced is equal to thequantity of goods sold (i.e., there is no change in the quantity ofgoods held in inventory at the beginning of the period and thequantity of goods held in inventory at the end of the period.In multi-product companies, it assumes that the relativeproportions of each product sold and produced are constant.
Break even analysis should be distinguished from two other managerial tools :-Flexible budgets and standard cost the variable expense budget is built on the samebasic cost – output relationship, but it is confined to costs and is primarily concernedwith the components of combined cost since the purpose is to control cost bydeveloping expenses standards that are flexibly to achieving rate this purpose oftenleads to measures of achieving that differ among costs and operation so that they cantbe readily added or translated in to an index of output for the enterprise as a wholestandard costs on the other hand on.