SAIDEEPMUKHOPADHYAY_IT_11200222017.pptx
- 1. GOVERNMENT COLLEGE OF ENGINEERING AND LEATHER TECHNOLOGY Presented by SAIDEEP MUKHOPADHYAY STREAM –INFORMATION TECHNOLOGY ROLL NO-11200222017 SUBJECT-ECONOMICS FOR ENGINEERS(HUMANITIES) PAPER CODE-HSMC301 TOPIC-BREAK EVEN ANALYSIS
- 2. INTRODUCTION When calculating the sales volume required for your company to turn a profit, break even analysis is employed. The break even analysis can be helpful when creating a price strategy as part of a marketing or company plan. In terms of business and economics, especially cost and accounting, the break-even profit (BEP) is the point at which costs or expenses and revenues are equal: there is no net loss or gain, and one has "break even. Total cost=Total revenue=B.E.P
- 4. HOW TO CALULATE BREAK EVEN POINT • Knowing your fixed and variable expenses is necessary to determine the break-even point. • The sales volume at which total revenue and total costs are equal is known as the break-even point. • The formula for calculating the break even point: • Break even point= Fixed cost/(Price-Variable cost) • Let us assume your fixed costs are $10000 per months, and your product sells for $50 with a variable cost for $30 • Break even point= $10000/($50-$30)=500 units • This means that you need to sell 500 units per month to break even.
- 5. BREAK EVEN ANALYSIS We must first examine the revenue and Cost Price associated with a product in order to determine how profitable it will be. Basically there are two ways by which a cost is incurred : a) Fixed cost: Payment for fixed factors of production in the short run is known as fixed cost s. Fixed costs do not change with the change in quantity of production. Example: Rent, insurance and wages. b) Variable cost: Payment that changes with production level or sales. Example: Costs of materials used in the production of goods.
- 6. USES OF BREAK EVEN POINT Helps in determining the required minimum sales volume. It is useful in setting tender price. It is useful in assessing how an organization's profitability is affected. It is helpful when selecting whether to replace existing plants with new ones. Helpful in terms of quantity and pricing. useful for calculating marginal cost.
- 7. ASSUMPTIONS OF BREAK EVEN ANALYSIS Fixed costs and variable costs can be used to categorize the overall expenses. Semi-variable cost is ignored. Cost and revenue functions continue to be linear. The price of the product is assumed to be constant. The volume of sales and volume of production are equal. The fixed costs remain constant over the volume under consideration. It assumes constant rate of increase in variable cost.
- 8. Managerial uses of Break even analysis Break even analysis is useful to management because it gives a detailed view of a company's earnings structure at a very small scale. The break even analysis not only identifies the firm's areas of economic strength and weakness, but it also narrows in on specific levers that may be used to increase profitability. It assists the management in making wise decisions when the government's tax and subsidy policies change.
- 9. The break even analysis can be used for following purposes Margin of safety: The business's strength is reflected in the margin of safety. It allows a corporation to determine the precise amount it has gained or lost, as well as whether they are over or below the break even point. Margin of safety=(Current output-Break even output) Margin of safety=Actual sales-BEP sales Margin of safety=(Current output-Break even output)/(Current output)*100
- 10. TARGET PROFIT Calculating the amount of sales required to reach a specific profit may be done using the break even technique. When a firm has some target profit this analysis will help in finding out increase in sales by using the following formula: Target sales Volume= Fixed cost+Target Profit/Contribution margin per unit
- 11. Change in Price The decision to lower prices or not is one that the management must frequently make. Management have to think before they take the issue as their foremost aim is to gain profit. A reduction in prices leads to reduction in their contribution margin. This means that the volume of sales will have to be increased even to maintain the previous level of profit. The higher the reduction in the contribution margin , the higher is the increase in sales needed to ensure the previous profit.
- 12. SALES VOLUME The formula for determining the new volume of sales to maintain the same profit, given the reduction in price will be as follows:- New Sales Volume= Total fixed Cost+ Total profit/New selling price-Average variable Cost Change in costs: When costs undergo change the selling price and quantity produced and sold also undergo changes. Change in cost can be of two ways :- 1. Change in Variable cost 2. Change in Fixed cost
- 13. CALCULATION The break even point(in terms of Unit Sales(X)) can be directly calculated in terms of Total revenue (TR) and Total cost(TC) as: TR=TC where P*X=TFC+V*X TFC=Total fixed Costs P*X-V*X=TFC P is unit sale Price, (P-V)*X=TFC V is unit variable Cost
- 14. EXAMPLE • For eg: Let us assume that it costs $50 to produce a pen there are fixed costs of $1000, the break even for selling the widgets would be: If selling for $100: 20 widgets Calculation: 1000/100-50=20 If selling for $200: Calculation: 1000/200-50=6.7 We have made conclusion that company should sell products at higher price to reach BEP faster.
- 15. LIMITATIONS • Break even analysis is just a supply side (costs only) study since it provides no insight into the likelihood that the product will be purchased at the various prices. • We are assuming that fixed costs (FC) are constant. • It is assumed that average variable costs per unit output remain constant, at least throughout the range of the probable sales volume. • In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant.
- 16. CONCLUSION • A company should ensure to determine their break even point before selling its products. • Break even analysis is a supply side analysis; that is only analyses the cost of the sales. • It does not analyze how demand may be affected at different price levels. • In order to know how you price your product you first have to know how to determine break even point.
- 17. REFERENCES Engineering Economics (MCGRAW HILL SERIES IN INDUSTRIAL ENGINEERING AND MANAGEMENT SCIENCE) Engineering Economics James L.Riggs Google Wikipedia