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“A STUDY ON BREAK EVEN ANALYSI OF A
FIRM”.
A Mini Project Report submitted as per the requirement of the curriculum for the partialfulfillment for the award of the degree of Master of business Administration (MB
Submitted by:
Yogesh R
58
Submitted to:
Prof. S.Guru basava Aradhya
Professor – Managerial Economics
RNSIT
MBA Department
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RECEIVED MARKS COMMENTS
FACULTY ON
DOMAIN
SOFT SKILLS
Project given on : 11 October 2011
Submission Date : 15 December 2011
Actual Submission : 15 December 2011
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TABLE OF CONTENTS
Chapter 1
- Introduction--------------------------------------------------------4
*Abstract----------------------------------------- 4
*Objectives--------------------------------------- 5
- Methodology--------------------------------------------------- 5
*Primary Data---------------------------------------------5
*Secondary Data------------------------------------------5
- Limitation--------------------------------------------------------10
Chapter 2
- Conceptual Relevance -------------------------------------------6
Chapter 3
- Analysis and Interpretation-------------------------------------6
Chapter 4
- Findings-----------------------------------------------------------7
- Suggestions-------------------------------------------------------8
- Conclusion--------------------------------------------------------11
Annexure
- Bibliography--------------------------------------------------------20
- Websites-------------------------------------------------------------20
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INTRODUCTION
Break Even Analysis
It is a widely used technique to study the cost -volume –profit relationship. The narrower
interpretation of term break –even analysis refers to system of determination of that level of activity
where total cost equals total selling price. The broader interpretation refers to that system of analysis
which determines probable profit at any level of activity. It portrays the relationship between the cost
of production, volume of production and sales value.
Break –even analysis indicates the level of sales at which cost and revenue are in equilibrium .The
equilibrium point is commonly known as break even point, The break even point is that point of sales
volume at which total revenue is equal to total cost.
Utility of Break Even Analysis:
It is the most useful technique of profit planning and control. It is a device to explain the relationship
between the cost volume profit .The utility of break even analysis lies in the following advantages:
1) Provided detailed and understandable information:
Break even analysis is a simple concept to present and interpret accounting data. Many business
executives and other are unable to understand accounting data contained in the financial statements
and reports but break even charts visualizes information very clearly and a look at a glance shall give a
vivid picture of whole affairs. The different elements of cost direct material, direct labour, overheads
(factory, office and selling etc) can be presented through an analytical break even chart. Further the
information is in a simple format therefore it is clearly understandable even to layman.
2) Profitability of product and business can be known:
The profitability of different can be known with the help of break even chart, besides the level no
profit no loss .The problem of managerial decision regarding temporary or permanent shutdown of
business or continuation at a loss can be solved by break even analysis .It is thus provides the basis
information for profit improvement studies and it is useful starting point for the detailed
investigation.
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3) Effects of changing of cost and sales price can be demonstrated:
The effect of changes of fixed and variable cost at different level of production on profits can be
demonstrated by graph legibly. In other words relationship of cost, volume, profit at different level of
activity and varying selling prices is shown through chart. Thus it studied requisites for survival of the
company.
4) Cost control can be analyzed:
The relative importance of fixed in the total cost of product can be analyzed and if the total cost are
high, they can be controlled by the management. Thus it is a managerial tool for control and reduction
of cost, elimination of wastages and achieving better efficiency.
5) Economy and efficiency can be affected:
The capacity can be utilized to fullest possible extent and economies of scale and capacity utilization
can be affected. Comparative plant efficiency can be studied on break even chart. The efficiency of
output is indicated by the angle of incidence formed at intersection of sales line and the variable cost.
6) Diagnostic tool:
It is useful diagnostic tool. It indicates to management the cause of increasing break even point and
falling profit the analysis of these causes will reveal that what action should be taken. If break even
point as a percentage of capacity is increasing, it indicates the unfavorable condition and need
immediate action .It is possible that due to plant expansion absolute break even point may increase.
This situation where break even point as a percentage of capacity may does not increase, is not
unfavorable
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Analysis and Interpretation
The formula: Don't worry, it's fairly simple. To conduct your breakeven analysis, take your
fixed costs, divided by your price, minus your variable costs. As an equation, this is defined as:
Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs)
This calculation will let you know how many units of a product you'll need to sell to break even.
Once you've reached that point, you've recovered all costs associated with producing your
product (both variable and fixed).
Above the breakeven point, every additional unit sold increases profit by the amount of the unit
contribution margin, which is defined as the amount each unit contributes to covering fixed costs
and increasing profits. As an equation, this is defined as:
The graphic method of analysis (below) helps you in understanding the concept of
the break-even point. However, the break-even point is found faster and more
accurately with the following formula:
Q = FC / (UP - VC)
where:
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Q = Break-even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
UP = Unit Price
Therefore,
Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)
Break-Even Point in Units = Total Fixed Costs
Selling Price per Unit – Variable Costs per Unit
Calculating break-even:
Please note that the figures used in these examples are purely hypothetical. If you are planning a
business similar to one of the examples, please do not use these figures as an industry standard.
You need to do your own research to find real, market-related figures. The function of the figures
used here is purely to further explain the concept of break-even.
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A service business
Let’s take a barbershop and let’s suppose the overheads of the business are something like this:
Owner’s salary R15 000
Rental R7 500
Fixed wages R7 000
Cleaning services R750
Electricity R450
Telephone R500
Magazine subscriptions R90
Repairs and maintenance R250
Security R450
Bookkeeping R650
Total overheads R32 640
In other words, the fixed costs or indirect costs are Rs 32,640 per month. The business will spend
this amount even if it doesn’t get a single client.
What about the direct costs (variable costs or cost-of-sales)? How much does the business spend
every time a client walks in an has his hair cut? It’s a service business, so direct costs are usually
low. Let’s say it looks like this:
Consumables (hair gel etc) R5
Barber’s commission R10
Total direct cost per sale R15
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The going rate for a hair-cut in the area is R70, and the business owner decides, wisely, to stick
to the going rate.
What is his break-even point?
Step 1: Work out the gross profit per sale
Gross profit per sale = sales price – cost-of-sale
Therefore
Gross profit per sale = R55
Step 2: Work out the gross profit percentage
Gross profit/sales x 100 = gross profit percentage
R55/R70 x 100 = 79%
Step 3: Work out the break-even point
Breakeven = overheads/gross profit percentage
Therefore
Breakeven = R32 640/0,5 = R41 316
The barbershop therefore has to do R65 280’s worth of hair-cuts a month to break even. That
represents about 590 clients a month, because R65 280/R70 = 590 per month, or 26 clients a day.
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Limitations of Break-Even Analysis
Although, break-even analysis is a very useful risk assessment technique and a useful device for
testing the sensitivities of business performance, the following limitations must be considered:
All costs resolved into fixed or variable
Variable costs fluctuate in direct proportion to volume.
Fixed costs remain constant over the volume range.
The selling price per unit is constant over the entire volume range.
The company sells only one product, or mix of products tends to remain constant.
Volumetric increase is the only factor affecting costs.
The efficiency in the use of resources will remain constant over the period.
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CONCLUSION
Break-even analysis is only a supply side (costs only) analysis, as it tells you nothing
about what sales are actually likely to be for the product at these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are constant per unit of output, at least in the range of
likely quantities of sales.
It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e.,
there is no change in the quantity of goods held in inventory at the beginning of the
period and the quantity of goods held in inventory at the end of the period.
In multi-product companies, it assumes that the relative proportions of each product sold
and produced are constant.