Break- even Analysis

Dr. Mahendra P.Agasty

 Break-Even Analysis

• Break-even Analysis is known as cost-volume profit Analysis

• Break-even analysis finds out the point at which revenue and cost are exactly
equal
 Formula
• Break-even point (in unit) =
• Break Even Sales =
• Contribution = Selling Price – Variable Cost
• Contribution = Fixed Cost + Profit
• Targeted Volume to get desired amount of
Profit =
• Targeted Sales to get desired amount of Profit
=
 Examples
Variable Cost: Rs 100
Fixed Cost: Rs. 1,00,000
Capacity : 2000 unit
Selling Price: Rs. 200
Find :
a) Break-even Unit
b) Number of unit to be sold to get a profit of
Rs. 30,000
 FC
B.E.Po int 
SP  VC
100000
  1000
200  100
100000  30000
 1300
200  100
 Example
• Fixed Expenses: Rs. 4,00,000
• Materials: Rs 10 per unit
• Labour : Rs 5 per unit
• Fuel : Rs 3 per unit
• Carriage : Rs. 2 per unit
• Selling Price : Rs. 40
Find:
a) Break-even point (unit)
b)New BEP if selling price is reduced by 10% per
unit.
 400000
BE   20000
40  20
400000
NEBE 
36  20
 P/V Ratio

• It expresses the relationship between the contribution and

sales. It is known as contribution to sales ratio.

P ratio  Contribution
V Sales
Change in contribution

Change in sales
Change in profit

Change in sales
 Uses


Variable cos t to sales  1  P
V

ratio sales
Fixed cos t
B.E.Sales 
p ratio
v
Fixed cos t  profit
T arg ated sales to get desired profit 
p ratio
v
Pr ofit
M arg in of safety 
p ratio
v
 Examples
Find P/V ratio
If fixed cost is Rs. 10,000 and break-even sales
are Rs. 25,000
FC
B.E.Sales 
P ratio
V
10,000
25,000 
P ratio
V
 0.440% 
 Example
From the following data calculate
a) P/V ratio
a) Break-even point expressed in amount of sales
in rupees
b) How many units must be sold to earn a net
income of 10% of sales
Selling Price: Rs 20 per unit
Variable cost : Rs 12 per unit
Fixed cost : Rs. 2,40,000
 Solution
P ratio  contribution  sp  vc  20  12  0.4(40%)
V sales sp 20
FC 240000
B.E.Sales    6,00,000
P ratio 0.4
V
xunits
20 x  2,40,000  12 x  2 x
x  40,000units
 Example
• Given: Break-even point Rs. 30,000
• Fixed Cost : Rs 6000
a) P/V ratio
b) Sales to make a profit of Rs.1500
c) Variable cost to the actual sales
FC
B.E.Sales 
P ratio
V
6000
30000   0.2(20%)
P ratio
V
FC  profit 6000  1500 7500
   37500
0.2 0.2 0.2
1  p ratio  sales  80%of 37500  30000
 v 
 Margin of Safety

• It is the difference between the total sales and

the Break even sales. It may be expressed as
monetary terms or as percentage of actual
sales
• Margin of Safety = Actual sales – Break-even
sales
• Margin of Safety (ratio) =
• Margin of Safety (in units) =
• Margin of Safety=
 Example
Sales(Rs.) Profit(Rs.)

2016 1,20,000 8000

2017 1,40,000 13,000

Find:
a) P/V ratio
b) B.E.Sales
c) Profit when sales are Rs. 1,80,000
d) Sales required to earn a profit of Rs. 12,000
e) Margin of safety in 2016
P ratio  change in profit  5000  1  0.25(25%)
V change in sales 20000 4
FC
B.E.Sales 
p ratio
v
We have to findout Fixed cos t
In 2016 sales are 1,20,00
so contribution  25% of 1,20,000  30,000( fixed cos t  profit )
In 2016 profit is 8000
FC  30,000  8000  22,000
22,000
B.E.SALES   88,000
0.25
25% of 1,80,000  45,000
45,000  22,000  23,000( profit )
22,000  12,000
 1,36,000
0.25
M arg in of safety  1,20,000  88,000  32000
 Example
Period Total sales Total Cost

1 42,500 38,700

2 39,200 36,852

From the following data relating to a company

calculate (a) Break-even sales (b) Sales
required to earn a profit of Rs. 6,000 per
period
change in total cos t 1848
  0.56(56%) rate of var iable cos t
change in sales 3300
P ratio  1  rate of var iable cos t  1  0.56  0.4444% 
V
56% of 42,500  23800(var iable cos t )
Total cos t  38700
FC  38700  23800  14900
14900 14900
B.E.Sales    33863
p ratio 0.44
v
14900  6000
T arg ated sales   47500
0.44
 Question
Q No. 1
Konark limited has annual capacity of 50,000 units. It
currently sells 40,000 units at a price of Rs. 105. It has
the following cost structure.
Variable manufacturing cost per unit Rs. 45
Fixed manufacturing cost Rs.8,00,000
Variable Marketing and Distribution Cost Rs. 10
Fixed marketing cost Rs. 6,00,000
Find
• Break-even Point
• Margin of Safety
 14,00,000
B.E.Po int   2800units
105  55
B.E.Sales  2800 105  294000
M arg in of safety  AS  BES  (40000 105)  294000
 Contd…
Q No2.
ABC Ltd. provided you the following data:
Sales (4000 units @ Rs 25 each)
• Fixed Costs: Rs 18,000
• Variable Costs:
Material Consumed: Rs 40,000
Labour Charges: Rs 20,000
Variable Overheads: Rs 10,000
• Total Variable Costs = Rs.70,000
Find
• Break-even point in units and rupees
• Sales needed to earn a profit of 20% on sales
• Selling price to be fixed to bring down it BEP to 600 units under present
condition
 18,000
B.E. po int   2400units
25  17.5
B.E.Sales  2400  25  60000
18,000  20000
 25  126666
25  17.5
18,000
600 
x  17.5
 Contd…
Q No 3.
Company X has an overall P/V ratio of 60% .If
the Marginal cost of a certain product
assessed as Rs 12. What will be its selling
price?
P ratio  contribution  sp  vc
V sales sp
60 sp  12

100 sp
sp  30
 Contd…

Q No 4.
Konark Ltd. provided the following information
• Fixed Cost = Rs 8000
• Break-even Point = Rs 20,000
• Variable cost = Rs 60 per unit
Find
• P/V Ratio
• Profit when sales are Rs 40,000
• New Break-even point if selling price is reduced by
10%.
 FC
B.E.Sales 
P ratio
V
8000
20,000   0.4(40%)( p / v ratio )
p ratio
v
If sales are 40,000
contribution  40% of 40,000  16000( fixed cos t  profit )
Pr ofit  16,000  8000  8000
40 contribution sp  vc sp  60
  
100 sales sp sp
sp  100
If it is reduced by10%  90
8000
New B.E.Po int   90
90  60
 Contd…

Q No 5.
The following figures are available in respect of a concern
• Fixed Cost= Rs 1,20,000
• Variable cost per unit Rs. 3.00
• Selling price per unit Rs. 7.00
Determine
• P/V Ratio
• B.E.P
• Profit when the output is 50,000 units
• Profit with 10% increase in selling price.
p ratio  contribution  7  3  0.5714(57.14%)
v sales 7
120000
B.E.Sales   210010
0.5714
Sales (50,000  7)  3,50,000
contribution  57.14% of 350000  199990
Pr ofit  199990  120000  79990
 Contd…
Q No. 6
The following data are obtained from ABC Co. Ltd.
• Sales = Rs. 1,00,000
• Variable Cost= Rs. 60,000
• Fixed Cost = Rs. 30,000
You are required to calculate:
• P/V ratio
• Break-even point
• Margin of Safety
• Break-even point when there is 20 percent increase in selling price.
• Break-even point when there is 10% decrease in Fixed Costs.
P ratio  contribution  100000  60000  0.4(40%)
V sales 100000
30000
B.E.Sales   75000
0.4
M arg i of safety  100000  75000  25000
20% increase in selling price  120000
NewP / V ratio  120000  60000 / 120000  50%
30000
New BE SALES   60000
50%
10% DECREASE IN FIXED COST  27,000
27000
B.E.Sales   67500
40%
 Contd..
Q No7.
A manufacturer has made the following estimates:
• Selling price per unit= Rs .20
• Fixed Costs =Rs.15,00,000
• Variable cost per unit= Rs. 16
• Sales Volume 5,00,000
Calculate
• Break-even point
• Break-even Sales
• Margin of safety
• Contribution
 15,00,000
B.E.Po int   375000units
20  16
BE Sales  375000  20  7500000
M arg in of safety  (5,00,000  20)  7500000  2500000
Contribution  20  16  4
 Contd…
Q No.8
The following figures relate to a manufacturing
Company
2005 2006
Rs. Rs.
sales 50,000 80,000
Profit 10,000 25,000

Find out
P/V ratio
Fixed Costs
Break-even Sales
Margin of Safety in 2006
P Ratio  change in profit  15,000  0.5(50%)
V change in sales 30000
Contribution  50% of 50,000  25,000( fixed cos t  profit )
Fixed cos t  25000  10000  15,000
15000
BE Sales   30,000
50%
M arg in of safety in 2006  80000  30000  50000
 Contd..
Q No. 9
The following figures are available for the records of Utkal
Ltd. as at 31st March
2006 2007
Rs.(lakhs) Rs.(lakhs
Sales 150 200
Profits 30 50

Find
• P/V ratio
• Total Foxed Costs
• Break-even Sales
 Contd…
Q No. 10
The following are the estimates for the year 2004-
05 relating to a manufacturing concern:
• Sales unit 25,000
• Fixed Costs =Rs. 1,20,000
• Sales Value= Rs 4,00,000
• Variable cost= Rs. 8 per unit
You are required to calculate
• P/V ratio, Break-even point, Margin of safety
Selling price per unit  4,00,000 / 25000  16
p ratio  16  8  0.5(50%)
v 16
FC 120000
B.E.Sales    240000
P ratio 0.5
V

M arg in of safety  400000  240000  160000

 Contd..
Q No.11
Consider the following data of a company for the year
2013
• Sale Rs. 2,40,000
• Fixed Costs Rs. 50,000
• Variable Cots. Rs 75,000
Find the following
• P/V ratio
• BEP
• Margin of Safety
• Find sales to earn profit of Rs 1,00,000
P ratio  contribution  240000  75000  0.6875(68.75%)
V sales 240000
50000
B.e.Sales   72727.27
0.6875
M arg in of safety  240000  72727.27
50000  1,00,000
Desired profit 
68.75%
 Contd..
Q No. 12
Explain the term Break-even Analysis and
discuss its usefulness. Calculate the Break-
even point from the following data
• Sales : 550 units
• Sales receipts : Rs. 28,875
• Total Fixed costs : Rs. 16,000
• Total Variable Cots: Rs .11,000
 Contd..
• The following costs and sales of a manufacturing
company for the first half and second half of 2005-06
are given
First Half Second Half
Rs. Rs.
Sales 24,00,000 30,00,000
Total Costs 21,80,000 26,00,000

Find
P/V ratio
Fixed Costs
Break-even Point
Margin of Safety as percentage of
Sales
 Contd
Q No. 14
You are given the following information
• Fixed Costs =Rs. 4,00,000
• Breakeven Sales :\=Rs 20,00,000
• Profit= Rs 1,00,000
• Selling Price Per Unit : Rs 2,000
Find
• P/V ratio
• Calculate Total Sales
• Calculate variable cost per unit
 Contd…
Q No 15.
A firm incurs fixed expenses amounting to Rs.
12,000.Its variable costs of product X is Rs 5
per unit. Its selling price is Rs 8. Determine its
BEQ and safety margin for the sales of 5000
units.
THANK YOU