breakeven presenattion

8/7/2019 breakeven presenattion

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Break-even

Presented by:

Shiraz AliWasiq Ahmed

Muhammad Adil

Fahad

Teacher:Sir Kamran

(Stage-II)


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OBJECTIVEOBJECTIVETheThe break even pointbreak even point for a productfor a productis the point where total revenue received equals totalis the point where total revenue received equals totalcosts associated with the sale of the product, It iscosts associated with the sale of the product, It istypically calculated in order for business to determinetypically calculated in order for business to determineif it would be profitable to sell a proposed product, asif it would be profitable to sell a proposed product, asopposed to attempting to modify an existing productopposed to attempting to modify an existing product

instead so it can be made lucrative.instead so it can be made lucrative.

BREAK EVEN POINTBREAK EVEN POINTin economics is the point at which cost or

expenses and income are equal - there is no net

loss or gain, one has "broken even".


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Commonly, the Break-even point is defined to be the

level of sales where:

Revenues = Expenses

Let us have a look at a simple example.

Mr. Aliopens a flower shop.

Break-Even Analysis


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Fixed Costs:

Rent: 5,000

Utilities: 300

Helper: 1,500

Variable Costs:

Flowers: 40% of selling price

So we know that:

Selling price cost of flowers rent utilities helper= 0

when he breaks even

Break-Even Analysis


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Breakeven Analysis

Organizations face Variables Costs (VC). Variable Costs (VC) change with the volume of production, e.g. cost of

materials or labor.

Organizations face Fixed Costs (FC).

Fixed Costs (FC) do not change with volume of production and wouldbe incurred even if no products were manufactured or sold, e.g. Utilities,Advertising and Sales Expenses, Machinery.

Price (P) per Unit is the revenue obtained per unit.

Unit Contribution or Margin per Unit is the difference between price perunit and variable cost per unit, i.e.

Unit Contribution = P per unit VC per unit

Breakeven volume is found by dividing the total fixed costs by the unit

contribution Breakeven Volume (Units) = Total Fixed Costs

Unit Contribution


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Break Even Analysis Breakeven occurs when Total Costs = Total

Revenues

Total Costs = Fixed Costs + Variable Costs If TC are greater than TR than loss is incurred.

If TR are greater than TC than profit is incurred.

Typically TR are less than TC at beginning

stages of production

Raising prices will reduce BEP.

Lowering prices will increase BEP.


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To work out break-even we need to know various bits of

information:

The price you are charging

The variable costs (direct costs)of each unit - theseare the costs of raw materials, labour and soon that

can be directly attributed to each unit. The fixed costs (orindirect costs/overheads) - these

are the costs that stay the same whatever the level ofoutput and will be things like rent, marketing costs,admin costs and soon.

Once we have this information, we can work out thebreak-even level ofoutput. Let's look at an example:


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Worked example

Dragon Shirts Ltd, manufacturing mens

shirts. It has a factory which has a

maximumoutput of 70,000 shirts a year.


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Calculation of Break even by

Graphical Method:

Selling price per shirt - Rs20

Variable cost per shirt - Rs10

Total fixed cost per year - Rs400,000


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Step 1:

Draw the fixed cost line on the graph.

Fixed costs

RsRs


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Step 2: Add the Total Cost line

Total costs are fixed costs plus variable

costs.

Rs400,000 + (70,000 x Rs10) =Rs1,100,000


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Step 2:

Fixed costs +

Variable costs

Rs400,000

Rs

Rs


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Step 3Add the total revenue curve to the graph.

Total revenue for 70,000 shirts.

70,000 x Rs20 = Rs1,400,000


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RsRs

Rs


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Calculation of breakeven by

formulaShirts are sold for Rs20. The variable costs are

Rs10.

Rs20 - Rs10 = Rs10

Each shirt sold will provide Rs10 which can be

used to cover fixed costs. Once fixed costs arecovered each sale will contribute Rs10 towards

profit.


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The equation :

Total Fixed costs = Break-even point

Contribution per unit

Rs400,000 = 40,000 shirts

Rs10


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The margin of safety The difference between actual output and

the break-even output is known as the

margin of safety

(sales at full capacity - sales at B.E.P.) x 100

Margin of Safety = ---------------------------------------------------Sales at full capacity


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The margin of safety

x unitsBreak-even

output

margin ofsafety


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BREAK-EVEN ASSUMPTIONSThe selling price is not affected by thenumberof units sold.

Fixed cost remain the same, at all levelsofoutput.

Variable costs per unit are the same atall levels ofoutput.

All output is sold.


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USES OF BREAK EVEVN POINT

Helpful in deciding the minimum quantity of

sales

Helpful in the determination of tender price

Helpful in examining effects upon

organizations profitability

Helpful in deciding about the substitution of

new plants Helpful in sales price and quantity

Helpful in determining marginal cost


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LIMITATIONS Break-even analysis is only a supply side (costs

only) analysis.

It assumes that fixed costs (FC) are constant

average variable costs are constant per unit ofoutput,

quantity of goods produced is equal to the quantityof goods sold.

product sold and produced are constant.


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