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    Ipe 1111 - Lecture - 4

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    Ipe 1111 - Lecture - 4

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    IPE 1111_LECTURE - 4

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    6 views14 pages

    Ipe 1111 - Lecture - 4

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    arafiyo1850

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    You are on page 1of 14

    Lecture 4

    BREAK EVEN ANALYSIS

    SHAH MD ASHIQUZZAMAN NIPU


    ASSISTANT PROFESSOR
    IPE, MPE, AUST
    INTRODUCTION

    ➢ A breakeven analysis is used to determine how much sales


    volume your business needs to start making a profit.
    ➢ The breakeven analysis is especially useful when you are
    developing a pricing strategy, either as part of marketing plan
    or a business plan.
    ➢ In cost economics & business, the break even point (BEP) is the
    point at which cost, or expenses and revenue are equal: there
    is no net loss or gain.
    ➢ Total cost = Total revenue = B. E. P
    BREAK EVEN ANALYSIS

    In order to calculate how profitable a product will be, we must firstly look
    at the Costs Price and Revenue involved.
    There are two basic types of costs a company incurs.
    ❑ Fixed costs
    ❑ Variable Costs
     Fixed costs remain roughly the same regardless of sales/output level.
    Examples include Rent, Insurance, Machine and Wages.
     Variable costs are costs that change with changes in production levels or
    sales. Example include Costs of materials used in production of goods.
    –
    Total revenue line
    900 –

    800 – Break-even point


    Total cost = Total revenue Total cost line
    700 –

    Cost in dollars
    600 –
    VISUALIZATION 500 –
    Variable cost
    REPRESENTATION 400 –

    300 –

    200 –

    100 – Fixed cost


    |– | | | | | | | | | | |
    0 100 200 300 400 500 600 700 800 900 1000 1100
    Volume (units per period)
    ASSUMPTIONS

    1. All elements of cost i.e., production, administration and selling


    distribution can be divided into fixed and variable components.
    2. Variable costs remain constant per unit of output.
    3. Fixed cost remain constant at all volume of output.
    4. Selling price per unit remains unchanged or constant at all levels of
    output.
    5. Volume of production is the only factor that influences cost.
    6. There will be no change in the general price level
    DEFINATIONS

    Unit Price
     The amount of money charged to the customer for each unit of a
    product or service.

    Total Cost
     The sum of the fixed cost and total variable cost for any given level of
    production.
    (Fixed Cost + Variable Cost)
    DEFINATIONS (CONT…)

    Total revenue
     The product of expected unit sales and unit price.
     (Expected Unit sales*Unit Price)

    Profit/Loss
     The monetary gain or loss resulting from revenues after subtracting all
    associated costs.
     (total revenue-Total Costs)
    MODEL FORMULATION

    BEPx = break-even point in units Q = number of units


    BEP$ = break-even point in dollars produced
    s = price per unit (after all discounts) TR = total revenue = s×Q
    = total sales
    F = fixed costs
    v = variable cost per unit
    Break-even point TC = total costs = F + vQ
    occurs when

    TR = TC F
    F BEP$ =
    or BEPx = S
    s-v s-v
    sQ = F + vQ
    MODEL FORMULATION (CONT…)

    BEPx = break-even point Q = number of units


    in units produced
    BEP$ = break-even point TR = total revenue = s×Q
    in dollars = total sales
    s = price per unit (after F = fixed costs
    all discounts) v = variable cost per unit
    TC = total costs = F + vQ

    Profit = TR - TC
    = sQ - (F + vQ)
    = sQ - F - vQ
    = (s - v)Q - F
    CALCULATION

    Fixed costs = $10,000 Material = $.75/unit


    Direct labor = $1.50/unit Selling price = $4.00 per unit

    F $10,000 $10,000
    BEP$ = = =
    .4375
    = $22,857.14
    1 - (v/s) 1 - [(1.50 + .75)/(4.00)]

    F $10,000
    BEPx = = = 5,714
    s-v 4.00 - (1.50 + .75)
    VISUALIZATION OF SOLVING PROBLEM
    50,000 –

    Revenue
    40,000 –
    Break-even
    point Total
    30,000 –
    costs
    Dollars

    20,000 –

    Fixed costs
    10,000 –

    |– | | | | |
    0 2,000 4,000 6,000 8,000 10,000
    Units
    EXAMPLE

    For example,
    Suppose that your fixed costs for producing 100,000 product were TK 30,000 per year.
    Your variable costs are 2.20 TK for materials, 4.00 TK for labor, and 0.80 TK for
    overhead, for a total pf 7.00 TK per unit. If you choose a selling price of 12.00 TK for
    each product, then:
    BEPx = F/S - V
    = 30,000/12 - 7
    = 6000 units.
    This is the number of products that have to be sold at a selling price of 12 TK before your
    business will start to makes a profit.

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