Break Even Analysis

Topics: Variable cost, Costs, Fixed cost Pages: 32 (5428 words) Published: August 5, 2012
Chapter 7 - [ cost – volume – profit Analysis leverage ] Cost – Volume – profit Analysis
{or Break ever analysis )
The break even point (BEP) man be defined as that level of sales at which total revenue in equal to total costs x the co will make no profit x also will have no loss. The volume of sales corresponding to BEP is known as break even output . If the co producer & sells less than the BE output it would in an a loss &if it producer &sells more than the BE output it would more profit . Topics discussed are:

❖ Behavior of costs
❖ Basic assumptions
❖ Graphic analysis (
❖ Algebraic analysis (
❖ Multiproduct analysis

Basic Assumptions
1. Behavior of cost is predictable:
The conventional cost – volume – profit model is based on the assumption that the costs of the co are divisible into fixed & variable costs. Fixed costs remain uncharged for all level of opp & variable costs vary proportionately to volume. Hence the behaviour of costs is predictable. 2. Unit selling price is constant

The BE analysis assumes that the total revenue of the co is a linear function of the opp. The selling price per unit does not change with volume or be cause of other factors. 3. The co manufactures a stable mix

In case of a multiproduct co., break even analysis assumes that the product mix of the co. remains stable. Because in a multiproduct co. the BEP is calculated by dividing the total fixed cost of weighted contribution margin of all the products. If the proportion of any product in the total mix changes then the weighted contribution changes. 4. Inventory changes are nil

Break even analysis assumes that the volume of sales is equal to the volume of production during an accounting period. It means everything produced is sold. This is essential because in break even analysis the total costs are matched with total revenues for a particular period. Graphic Analysis

Selling price -> Rs.4/unit
|O/P Units |TR Rs |TFC Rs |TVC Rs |T.O . Rs | |0 |0 |300 |0 |300 | |100 |400 |” |300 |600 | |200 |800 |” |600 |900 | |300 |1200 |” |900 |1200 | |400 |1600 |” |1200 |1500 | |500 |2000 |” |1500 |1800 | |600 |2400 |” |1800 |2100 |

FIGURE
BE analysis is very commonly represented by means of break even charts. A BE chart shows the extent of profit or loss to the co. at different levels of activity or output. The horizontal axis indicates volume of output and vertical axis the costs and revenue TR is the total revenue which is obtained by the product of price per unit and volume of opp and is assumed to be linear, ie price is known & is constant. IC is sum of fixed and variable cost. IC is also linear & its linearity results from the assumption of constant variable cost per unit. FC component of TC is constant over a period of time.V.C. vary directly with the volume of production. FC to be in curved even when there is no production. V.C. is …… when there is no production. Since TC = FC + V.K., the TC curve originals from the vertical axis instead of origin & rises linearly. The point of interaction of the TC...