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Presented by:

GROUP NO. 10Ansuman Rath

Meenal JindalFakeha rahman

Rajeev D.R

Md. Shamshad Ansari

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Case Study: Krishna Bakery.Assume we have a Krishna Bakery in Anekal, The Financial account book

of Krishna Bakery reveals that its fixed costs are Rs.50,000/-. The costassociated with producing 1 unit of Black forest Pastry is Rs 3/-. The

bakery sales person sells pastries at Rs 13.00/- per unitNow, as the future managers of Anekal, we have to determine

y What are the minimum number of Pastries that has to be produced?and

y What is the minimum sales need to be done, so that the Krishna

bakerys investors get at least their invested money back ?

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Now lets discuss the factors

involved:

y Fixed cost:It is the cost that does not vary depending on production or saleslevels, such as rent, property Tax, insurance or interest expenses.

y Variable Cost:It is the cost that changes in proportion to a change in acompany's activity or business.

E.g.- Labour cost, Raw material cost.

y Contribution Margin per Unit =Contribution per margin Sales Priceper Unit Variable Costs per Unit.

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y Breakeven point

It is the point at which the company neither makes a profitnor suffers a loss.

y Breakeven Units :

Its the number of units that need to be sold in order to incurback the investment that has been done.

y

Break

Even Sa

les :It is the sales that has to be done to incur back the investmentdone.

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Methods of calculationMathematically,

Q = FC / (UP - VC)

Where,

y Q= Break-even Point, i.e., Units of production (Q),

y FC= Fixed Costs,

y VC= VariableCosts per Unit

y

UP = Unit Price of saley Therefore,

y Break-Even PointQ= Fixed Cost / (Unit Price - Variable UnitCost)

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yGraphically,

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Analysis of the case:

Here,y Fixed cost=Rs 50,000/-

y Variable cost =Rs 3/- per unit

y Selling Price=Rs13/- per unit

y Contribution margin per unit=Rs13-3=Rs 10/-

y Break even units=50000/10=5000 units

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Where it is applied.??

This concept is applied in all most all industries. For instance,

Manufacturing Industry

Service Industry

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What if???

What Happens to theBreakeven Point if Sales Change?

y For example, due to recession, your sales are starting to drop. As salesare dropping, you are in a sticky situation as we are not able to breakthe even point.

y In simple words, you are sales are doing bad and due to this, you are

compromising on getting back the total cost invested on the producthence resulting in losses.

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Solutiony We can either raise the price of our product or we can find ways to cut

our costs, our fixed and/or our variable costs.

y Decreasing the Fixed cost will move the BEP down and hencedecreasing the Break even Units sales to achieve. Similarly for theVariable cost , E.g. cutting down the salaries of the employee.

y Thus we can see that, we can set an easier BEP to achieve by the above

methods, keeping aside the price increase strategy.

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ultiple Break Even Analysisy In the examples ,the variable cost parameters and the price were

assumed to be constant because of which the graphs were linear.

y If the assumptions of the constant price is relaxed then we canintroduce a non linear cost and revenue function and by that we getmultiple break even points.

y However, in real life scenarios, most businesses face the multiple break

even points due to external factors like price increase/decrease in rawmaterials used, govt. impelling on higher taxes. Etc.

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Most of the firms manufacture out Multiple products. Even here , BEpoint can be calculated.However, the assumption has to be made thatthe sales mix remains constant. This is defined as the relative

proportion of each products sale to total sales. It could be expressed asa ratio such as 2:4:6, or as a percentage as 20%, 40%, 60%.

y The calculation of breakeven point in a multi-product firm follows thesame pattern as in a single product firm. While the numerator will be

the same fixed costs, the denominator now will be weighted averagecontribution margin. The modified formula is as follows:

ultiple Product Situations

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athematically,y Breakeven point (in units)=

Fixed costs /Weightedaverage contribution margin per unit

y One should always remember that weights are assigned inproportion to the relative sales of all products.Here, it will

be the contribution margin of each product multiplied byits quantity

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Thanks