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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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