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Break Even point

Break-Even Point
Break-even point of a firm is a point where total revenue equals total cost. It indicates the level of output at which the firm neither earns profit nor incurs loss. In other words it is a point of earning zero profit. No firm can remain satisfied with this level of output. Each firm would like to increase its profit. Similarly a firm, which is in a position lower than the break-even point, would like to reach the break-even point and thereafter cross this point at the earliest possible time. If a firm operates below the break-even point it cannot survive for a longer time. As the aim of any firm is to earn more and more profit each firm would like to operate at a level above its BEP. Break-even analysis is a simple and useful concept. It is based on certain assumptions, which may limit the utility and general applicability of this analysis. Although break-even analysis suffers from a number of limitations it still remains as an important tool of profit planning.

Main Assumptions:

  • Fixed cost and variable cost can be ascertained.
  • The behavior of fixed and variable costs will remain unchanged.
  • Management policies do not change as production changes
  • There will be no change in pricing due to change in volume.
  • Operating efficiency will not increase or decrease

Importance of Breakeven Point Analysis
Breakeven point analysis is important in a sense that it indicates the risk involve in the project undertaken. A higher breakeven point indicates that it will take more time to reach the zero profit position and obviously more time for earning profit and vice versa. A banker considering a short-term credit application will prefer a low breakeven point because it involves low risk. It is also important because it indicates at what level of sales the company will be profitable.

Break-Even Point is the initial investment purpose of a firm is where add up to income equivalents to add up to cost. It shows the level of yield at which the firm neither acquires benefit nor brings about misfortune. At the end of the day it is a point gaining zero benefit. This can be given a case like after:

Output Total Cost Total Revenue Profit
200 700 600 -100
300 900 900 0*
400 1100 1200 100

 Figure the Break-even point:

 FC-Fixed Cost                    VC-Variable Cost              TC-Total Cost

TR-Total Revenue            C-Contribution                  P-Profit

# Fixed Cost (FC) + Variable Cost = Total Cost (TC)

# Total Revenue (TR) – Total Cost (TC) = Profit (P)

# Total Revenue (TR) – Variable Cost (VC) = Contribution (C)

# Contribution (C) – Fixed Cost (FC ) = Profit (P)

 Recipe # 01

 BEP = Fixed Cost/Per Unit Contribution

 Or,   = Fixed Cost /Offering Price or selling price Per Unit – Variable Cost Per Unit

 Recipe # 02

BEP =     Fixed Cost/(Total Sales – Variable Cost)

 Outline:

Let, Fixed Cost Tk. 500.00, Variable Cost Tk.100.00, Total Revenue Tk. 900.00,

Along these lines, BEP = Tk. 500.00/(Tk.900.00-Tk.100.00)

= Tk. 0.63

Target Profit Analysis
Through the target profit analysis an organization will be able to know how much units it should sell to reach a target profit amount. This can be found by applying the following:

Margin of Safety (MS)
The margin of safety is the excess of sales of an organization over its BEP sales. It indicates  how safe the organization is towards acheiving its goal.

Margin of safety %  = (Margin of Safety/Sales) x 100

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