Marketing

• Marketing is the performance of the business

activities that direct the flow of goods and
services from the producer to the consumer
or end user. Itis the process of getting right
product to the right place in the right quantity
at the right price and right time.
 EVOLUTION OF MARKETING

The evolution of marketing took place in the

following main stages.
• 1. The stage of Economic self-sufficiency.
• 2. The Barter system.
• 3. Money system.
• 4. The stage of early capitalism.
• 5. Industrial revolution.
• 6. The emergence of marketing.
 MODERN CONCEPT OF MARKETING

• Now-a-days more stress is given on the marketing

concept.
• The modern concept of marketing gives emphasis
on consumer needs and the freedom of consumer
to choose.
• The marketing department becomes the main
management force in a company.
• Most companies realise that production is no longer
a problem, having the technical ability is not
enough, marketing the product is very important.
 MODERN CONCEPT OF MARKETING

The basic features of the modern concept of

marketing are
(a) Customer orientation
(b) Integrated marketing, and
(c) Profitable sales through customer's
satisfaction.
SELLING CONCEPT Vs MARKETING CONCEPT
SELLING CONCEPT Vs MARKETING CONCEPT
 MARKETING FUNCTIONS

• Marketing adds value to the product by the specific

functions it performs. The following chart describes
the classification of marketing functions:
 MARKETING FUNCTIONS

• There are basically eight functions in marketing. These

are :
• 1. Buying
• 2. Selling
• 3. Transporting
• 4. Storage
• 5. Standardization and grading
• 6. Financing
• 7. Risk-bearing and
• 8. Market information.
• Under selling we can include branding, packaging,
personal salesmanship, advertising and sales pro-motion.
• 1. Buying:- Buying involves both the marketing and the
customers. The marketing managers must know about the
type of customers, their consuming habits, demand and buying
pattern. For the consumers, the buying function includes a
consideration of price, quality, quantity, kind and style.
• 2. Selling. Selling creates a demand for a product. Selling
function involves
• (a) product planning and development,
• (b) finding out or locating buyers,
• (c) demand creation through salesmanship, advertising and
sales promotion,
• (d) negotiation of terms of sale, such as price, quantity, quality
etc.
• (e) sale contract leading to transfer of title and possession of
goods.
• 3. Transporting. Transporting involves the creation
of place utility. In order to have value goods must
first be transported from the place they are
produced to the place where they are needed.
• 4. Storage. It is concerned with storing finished
products properly without any damage, until they
are dispatched to the customers. It is also
concerned with maintaining stock of raw
materials, components etc. to meet production
schedules. The levels of inventory are frequently
pre-determined to meet the changing needs The
marketing manager must know of customers.
• 5. Standardization and Grading. Standardization
involves the maintenance of uniform size and quality
standards throughout the country. Standardization
assures quality. It promotes uniformity of products.
In buying a light bulb for example, few of us have
any doubts as to whether that bulb will fit or how
much light it will flourish. Products are produced in
different grades to fulfil the needs of various types
of customers. Grading means separating or
inspecting products according to established
standards. Grading provides a basis tor comparison
of similar products. Grading is particularly important
in agricultural products, milk, cotton, wheat etc.
• 6. Financing. Finance is the life blood of business.
Value of goods is expressed in money and it is denoted
by price to be paid by buyer to seler. Credit is
necessary in marketing. It plays an important role in
retail trade particularly in the sale of costly consumer
goods.
• 7. Marketing Information. The marketing personnel
must study the trends in market demand, supply,
prices and related market information. The knowledge
about the latest market information may help the firm
to reduce risk of loss in purchasing, in pricing, in
forecasting market demand and in facing competition
in the market. Securing and using market information
is a mark of good marketing management.
 Product Life Cycle:
• As consumers, we buy millions of products every year. And just
like us, these products have a life cycle. Older, long-established
products eventually become less popular, while in contrast, the
demand for new, more modern goods usually increases quite
rapidly after they are launched.
 Product Life Cycle Stages Explained:
• The product life cycle has 4 very clearly defined
stages, each with its own characteristics that mean
different things for business that are trying to manage
the life cycle of their particular products.
• Introduction Stage – This stage of the cycle could
be the most expensive for a company launching a
new product. The size of the market for the product is
small, which means sales are low, although they will
be increasing. On the other hand, the cost of things
like research and development, consumer testing, and
the marketing needed to launch the product can be
very high, especially if it’s a competitive sector.
• Growth Stage – The growth stage is typically characterized
by a strong growth in sales and profits, and because the
company can start to benefit from economies of scale in
production, the profit margins, as well as the overall amount
of profit, will increase. This makes it possible for businesses
to invest more money in the promotional activity to
maximize the potential of this growth stage.
• Maturity Stage – During the maturity stage, the product is
established and the aim for the manufacturer is now to
maintain the market share they have built up. This is
probably the most competitive time for most products and
businesses need to invest wisely in any marketing they
undertake. They also need to consider any product
modifications or improvements to the production process
which might give them a competitive advantage.
• Decline Stage – Eventually, the market for a product
will start to shrink, and this is what’s known as the
decline stage. This shrinkage could be due to the
market becoming saturated (i.e. all the customers
who will buy the product have already purchased
it), or because the consumers are switching to a
different type of product. While this decline may be
inevitable, it may still be possible for companies to
make some profit by switching to less-expensive
production methods and cheaper markets.
ADVERTISING
 Concept of Advertising:

• The word "Advertising" has been derived from Latin term

"adverto".
• 'ad' means towards and 'verto' meaning to turn. To turn the
attention of the people towards the product.
• American Marketing Association defines advertising as "any
paid form of non-personal presentation and promotion of
goods and services or ideas by an identified sponsor".
• "Advertising is any form of paid non-personal presentation
of ideas, goods or services for the purpose of inducing
people to buy" - Weeler.
 Concept of Advertising:
• From the above definitions it could be said briefly that
advertising is :
• (i) paid form of communication,
• (ii) having an identified sponsor,
• (iii)a presentation about the product or service or idea,
• (iv) done through diverse media, and
• (v) meant to improve/create the sales of goods and services.

• It should be noted that advertisement is the message itself.

Advertising is a process- it is a program or a series of activities
necessary to prepare the message and get it to the intended
markets.
 Functions and Objectives of Advertising
• The purpose-of advertising is to sell something- a product, a
service, or an idea. Stated another way the real goal of
advertising is effective communication. That is, the ultimate
effect of advertising should be to modify the attitudes and/or
behavior of the receiver of the message.
• Depending on its ·marketing objectives one or more of the
following may be the objectives of the advertising:
• (i) To introduce a new product, model, or service to the market.
• (ii) To facilitate or increase the sale of present products by
constantly keeping the commodity before the market, thereby
maintaining consumer awareness, offsetting the advertisements
of competing firms and reducing the amount of personal sales
effort required to secure an order.
 Functions and Objectives of Advertising

• To enlighten the public as to the features and uses of the products and
overcome tradition or prejudices that may retard consumption.
• (iv) To create or enhance company goodwill and thereby maintain or
increase demand for the product.
• (v) To create confidence in the minds of buyers regarding quality of
the goods or products of the company
• (vi) Make the product stand against its competitor's products.
• (vii) To improve dealer relations.
• (viii) Reach people inaccessible to the sales force.
• (ix) Enter a new geographic market or attract new group of customers.
• (x) Advertising campaign may also be designed to lengthen the season
for the product (as has been done in case of soft drinks).
• (xi) to disseminate information about the changes that have come in
the form, content, colour, brand etc., of production.
 SALES PROMOTION
• In modern business world, sales promotion is considered as
an instrument to lubricate the marketing efforts.
• Sales promotion is essentially a direct and immediate
inducement that adds an extra value to the product so that
it prompts the dealers, distributors or consumers to buy the
product.
• Sales promotion activities are complementary to advertising
and personal selling efforts.
• According to the American Marketing Association, "In a
specific sense, sales promotion includes those sales activities
that supplement both personal selling and advertising and
co-ordinate them and help to make them effective such as
displays, shows and expositions, demonstrations and other
non-recurrent selling efforts not in the ordinary routine."
 SALES PROMOTION

• Examples of sales promotion are free product samples,

premiums and trade shows. For many organizations,
including the marketers of foods, toys and clothing, store
displays are the important sales promotion devices.
Displays expose promotion messages to consumers at the
time
• and place of purchase. Numerous consumer products are
purchased in stores that use self-service selling methods.
• Marketers of such items need effective displays in order to
distinguish their offerings from those of other firms. Sales
promotion is a vital link between advertising and field
selling. It aims at stimulating consumer purchasing at the
point of sale and dealers’ effectiveness at the retail channel
of distribution.
 Sales promotion differs from advertising

• Whereas advertising is mostly an indirect and subtle

approach towards persuading consumers to buy a
product, sales promotion is a direct and almost open
inducement to consumers to immediately try the
product.
• - While advertising normally has long-term objectives
like building brand awareness or building consumer
loyalty or responding a brand, sales promotion
performs an immediate task of increasing current sales.
• - While advertising helps sales by adding some durable
and long-term value to the product, sales promotion
aids selling by temporarily changing the existing price-
value relationship of the product.
 Objectives of sales promotion
Marketers use sales promotion to meet several marketing
needs, such as:
• - For introducing new products.
• - For unloading accumulated inventory
• -For overcoming a unique competitive situation.
• - For overcoming seasonal slumps/decline. ·
• -As a support and supplement to the advertising effort.
• - As a support and supplement to the salesmen's effort.
• - For persuading salesmen to-sell' the full line of
products.
• - For persuading dealers to buy more/increase the size
of orders
Sales promotion schemes
 CHANNELS OF DISTRIBUTION

• According to American Marketing Association, "A channel of

distribution, or marketing channel, is the· structure of intra-company
organization units and extra-company agents and dealers, wholesale
and retail, through which a commodity, product or service is
marketed".
• Producers normally distribute the product directly but use a number
of marketing intermediaries for taking their products to users.
Marketing intermediaries bear a variety of names such as: sole-
setting agents, marketers, wholesalers, distributors, Stockiest,
retailers, authorized representatives, brokers/commission agents etc.
• All such intermediaries constitute the distribution channel. The
depots/show-rooms and other direct selling methods also form a
part of distribution channel.
 CHANNELS OF DISTRIBUTION
• Functions of channels of distribution
• The following are some of the functions performed by different
channels of distribution.
• 1. Helps in Production Function. The producer can concentrate
on production function leaving the marketing problem to
middlemen who specialize in the profession. The finance,
required for organizing marketing, could profitably be used in
production where the rate of return is greater
• 2. Matching Demand and Supply. The chief function of
intermediaries is to combine the assortments products and
components of different manufactures into suitable
assortments convenient lo final users. According to Alderson
"the gool of marketing is the matching of segments of supply
and demand". They break up the bulk and meet the small-size
needs of individual consumers.
 Functions of channels of distribution

• 3. Provide distribution efficiency to manufacturers. In the first

place, distribution channels bring together the makers and the
users in an efficient and economic manner. It will not be practical
for any manufacturer to organise a network of his own selling
points throughout the market and sell his products directly to
consumers totally avoiding outside distribution channels. Just like
mass manufacturing, mass distribution too needs large resources
in terms of money, materials and men. No manufacturer can easily
command such resources profitably.
• 4. Channels provide salesmanship. Distribution channels in
particular, assist in establishing new products in the market.
Dealer-recommended selling is common in many consumer
products. The dealers promote the purchase through their word-
of-mouth communication. They also provide pre-sale and after-sale
service to consumers. They are in constant contact with customers
und provide feedback to the producers about the reactions of the
 Functions of channels of distribution

5.Channels help Merchandise the products. Through

merchandising, distribution channels help reinforce/create the
awareness about the' product among the customers. When a
customer visits a retail shop, his attention can be concentrated
by an attractive display of new product/brand, increasing his
awareness of the product and his interest in the product.

Channels help in implementing the pricing mechanism. In

pricing the product, the producer should invite suggestions
from the middlemen who are very close to the ultimate users.
They assist in arriving at the price level that is acceptable to the
maker as well as the user.
 Different Channels of Distribution
(a) Channels of distribution for consumer goods.
• Consumer goods may be distributed generally through
channels, in each of which the sales office or sales branch may
be used as the additional alternative by the manufacturer.
There are five principle channels of distribution :
(i) Direct distribution from manufacturer to ultimate consumer.
(ii) Manufacturer to retailer to consumer, where goods may be
purchased directly from manufacturers, or retail stores may be
opened by manufacturer.
(iii) Manufacturer to wholesaler to retailer to consumer.
(iv) Manufacturer to agent to wholesaler to retailer to consumer.
(v) Manufacturer to agent to retailer to consumer.
Distribution channels of consumer goods
 Channels of distribution for industrial goods

Industrial goods are distributed by manufacturer through four

important channels, although he may also use his sales branch or
sales office for the same.
• (i) Manufacturer to industrial user. Large installations like
generators, boilers, plants etc. are sold through this direct
channel.
• (ii)Manufacturer to industrial distributer to user. Operating
supplies and small accessory equipment, such as building
materials, construction equipment, air-conditioning
equipments etc. are sold through this channel.
• (iii)Manufacturer to agent to user. This channel is often used
when a new product is introduced. or a new market is entered.
• (iv) Manufacturer to agent to industrial distributer to user.
Channels of distribution for industrial goods
 MARKETING RESEARCH

• "Marketing research may' be defined as the

application of scientific method to the solution of
marketing problem."

• "Marketing research is the systematic, objective

and exhaustive search for and study of the facts
relating to any problem in the field of marketing"
- Richard Crisp
 MARKETING RESEARCH

CLASSIFICATION
The various marketing research problems can be
classified based on the subject matter of research as
follows: ·
• Research on products
• Research on market
• Research on consumer
• Research on advertising and promotion
• Research on distribution
• Research on price
• Research on competition
• Research on methods.
 MARKETING RESEARCH
Research on Products
• Studies on competitive position of a product/brand.
• The level of consumer acceptance of a
product/brand.
• Study of packaging/package design, size etc.
• Study of new uses of product.
• Review of product quality.
• Study on maintenance and service requirements.
 MARKETING RESEARCH
Research on Market
• Market share analysis.
• Demand analysis.
• Determining market characteristics.
• Market segmentation studies.
• Analysis of market territories.
• Short range and long-range sales forecasting.
• Study of market trends.
 MARKETING RESEARCH
Research on Consumer
• Studies on consumer behavior.
• Buyer motives.
• Consumer preferences, tastes.
• Types of customers, prices they are willing to
pay.
• Study of consumer resistance, dis-satisfactions,
complaints about the product quality and other
aspects.
 MARKETING RESEARCH
• Research on Sales Promotion
• Studies on advertising effectiveness.
• Studies on media and their relative
effectiveness.
• Cost-benefit studies on sales promotion
aspects.
• Analysis of salesmen's territories etc.
 MARKETING RESEARCH

• Research on Distribution
• Studies on distribution policies, transportation,
warehousing, channels of distribution etc.
• Research on Pricing
• Evaluating the pricing strategy of the enterprise.
• Assessing the general pattern of pricing
followed by the industry.
• Studying effect of price on sales.
 MARKETING RESEARCH

Research on Competition
• Trends in competition.
• Evaluating competitors' products, prices,
channels of distribution.
• Share of market and sales methods used by
competitors.
• Strengths and weaknesses of competitors and
analysis of their cost vs performance.
 MARKETING RESEARCH
Research on Sales Methods
• Testing new sales programs.
• Analysis of salesmen's territories/sales quotas.
• Measuring salesmen's effectiveness.
• Methods for attracting new customers etc.
 STEPS IN MARKETING RESEARCH AND MARKET SURVEY

• Marketing research is aimed at solving the

problems faced by marketing executives. The
major steps involved in marketing research are:
(1) Identification of the marketing research
problem and defining the objective of the research.
(2) Determining the information needed and
sources.
(3) Analyzing and interpreting the information.
(4) Preparing the Research Report.
(5) Follow up and Action.
SOURCES OF COLLECTING MARKETING RESEARCH DATA

• The Research Instruments

• Data Collection
• Internal Sources
• External Sources
• Government Sources
• International Sources
• Newspapers.
• Magazines and Journals.
• Yellow Pages/Stand-alone Directories
• Industrial Product Finder
• Data through Telephone
OBJECTIVES/BENEFITS OF MARKET RESEARCH

1. Reduction of Risk
2. Production of new items.
3. Assists in Formulation of Marketing plans
4. Helps for survival and growth of the
company
5. Customer's satisfaction and profit
6. Minimization of cost is possible
7. Discovery of potential markets
8. Planned production
 MARKET SURVEY

• Market survey is the process of collecting the information

directly from individual respondents either through personal
interview or through mail questionnaires or telephonic
interview.
• It 1s one of the most widely used market research techniques.
• It is used when the required data is not available from the
company s internal records and from external published
sources.
• It amounts to original field research work for the purpose of
collecting primary data.
 MARKET SURVEY

There are two types of market survey, (a) Sample Survey, (b)
Census Survey.
The steps involved in market survey are as below:
(1) Planning the survey
• Problem definition
• Selection of survey method
• Sampling
• Questionnaire development
• Pilot survey
(2) Field work
• Selection and training of investigators
• Interviewing/collection of data
• Supervision
 MARKET SURVEY

(3) Analyzing and Interpretation of data

– Editing
– Tabulating, processing (Mechanical, manual) and
interpreting data
– Statistical analysis and interpretation
(4) Report Making
– Summarizing findings and recommendations
– Report writing Selection of survey method
5. Implementation and follow up
(i) Implementation of findings and recommendation
of report.
(ii) Follow up of implementation programme.
 BREAK-EVEN ANALYSIS

• The technique to study the total cost, total revenue and

output relationship is known as Break Even Analysis. It is
also termed as the study of cost volume profit (CVP)analysis.
• In its narrow sense, it refers to a system of determining that
levels of operations where the undertaking neither earns
profit nor suffers from a loss, i.e. where the total cost is
equal to total sales, i.e. the point of zero profit.
• In a broad sense it refers to a system of analysis that can be
used to determine the probable profit at any level of
activity.
• Through the knowledge and information obtained from the
breakeven analysis, complicated budgeting and profit
planning issues can be made easy and possible.
 BREAK-EVEN ANALYSIS

• Thus, the break-even analysis is a vital tool of financial

planning and control.
• Break-even analysis can be carried out in two ways:
(a) Algebraic method
(b) Graphical method.
• Usually, a break-even analysis is presented graphically, as
this method of visual presentation is particularly well-
suited to the need of managers to appraise the situation
at a glance.
• When presented graphically the break-even analysis takes
the shape of a break-even chart. The breakeven chart
shows the effect of volume of production on the profit
contribution
 BREAK-EVEN ANALYSIS
ASSUMPTIONS IN BREAK-EVEN ANALYSIS
The following assumptions are made while plotting a break-even
chart
1. The total cost of production can be divided into two Categories
(a) Fixed cost, (b) Variable cost.
2. Fixed cost remains constant i.e. it is independent of the quantity
produced and includes executive salaries, rent of building.,
depreciation of plant and equipment etc.
3. The variable cost varies directly and proportionately with the
volume of production. If V = Variable cost per unit and Q is the
quantity produced, variable cost = V × Q.
4. The selling price does not change with change in the volume of
sales. If P is the selling price per unit. The total sales income = P ×
 BREAK-EVEN ANALYSIS

5. The firm deals with only one product, or the sales mix
remains unchanged.
6. There is a perfect synchronization between production
and sales. This assumes that everything produced is sold
and there is no change in the inventory of finished goods.
7. Productivity per worker and efficiency of plant, etc.,
remains mostly unchanged.
Any change in any one of the above factors will affect the
break-even point and the profits will be affected by factors
other than volume. Hence, the result of the break-even
analysis should be interpreted subject to the limitations of
the above assumptions.
 BREAK-EVEN ANALYSIS
PLOTTING THE BREAK-EVEN CHART
1. The cost and the sales income (revenue) in rupees are plotted along the
vertical axis.
2. The quantity (volume of production) is plotted along the horizontal axis.
3. Fixed cost is represented by a straight line parallel to the horizontal axis.
4. The variable costs are superimposed upon the horizontal line
representing the fixed cost. This top line then represents the total cost line.
5. The sales income line passes through the origin.
6. The point of intersection of the sales income line and the total cost line
represents the breakeven point.
 BREAK-EVEN ANALYSIS
7. The shaded area between the total cost line and the sales income
line on the left-hand side of B.E.P. indicates loss; whereas the shaded
area on the right-hand side of B.E.P shows profit.
 BREAK-EVEN ANALYSIS
• The point of intersection of the total cost line and the income line
is called as the break-even point.
• The break-even point is that junction where income and costs are
exactly in balance.
• Thus, there is neither profit nor loss for that particular volume of
production.
• Break-even point indicates minimum operating level below which
it is dangerous to fall.
• As the performance reaches towards this non-profit point,
corrective measures should be taken to cut down the cost,
(increase output or raise selling price).
• The spread to the right of BEP shows the profit potential while to
the left represents the loss potential BEP is also called as the "'no-
profit no-loss point".
 BREAK-EVEN ANALYSIS

5.MARGIN OF SAFETY
• Margin of safety is the distance between the break-
even point and the output being produced.
• A large margin of safety indicates that the business can
earn profit even if there is a great reduction in output.
• If the margin of safety is relatively small then it
indicates that the profit will be considerably small even
if there is a small drop in output.
• A low margin of safety level indicates high fixed costs
and profits are not possible unless the output level is
sufficient enough to absorb fixed costs.
 BREAK-EVEN ANALYSIS
Margin of safety is generally expressed as
a. Ratio of budgeted sales to sales at BEP.
b. Ratio of actual sales to sales at BEP
c. Percentage of budget to BEP.
d. Percentage of budget to actual sales at BEP.
e. Percentage of the difference between actual sales and break-even sales to
budgeted sales.
In case unsatisfactory margin of safety, the following measures should be taken
a. Increase in the sale price.
b. Reduction in fixed costs.
c. Reduction in variable costs.
d. Increase in output
e. Stop production of non-profitable items and pay more attention towards profitable
items.
Mathematically: -
• Margin of Safety = Sales - sales at BEP / Sales = Profit × Sales / Sales -Variable cost
 BREAK-EVEN ANALYSIS
ANGLE OF INCIDENCE:
• The angle between the sales income line and the total cost line is called as angle of
incidence.
• A large angle of incidence indicates large profit and extremely favorable business
position management aims to widen the angle of incidence to improve the rate of
profitability.
• A narrow angle shows that even though fixed overheads are recovered, the profit
accrued shows à low rate of return. This indicates a large part of variable costs in
total cost.
PROFIT VOLUME (P/V RATIO):
• Profit volume ratio measures the profitability in relation to sales.
• The contribution at given output is defined to be the difference between total
sales and total variable costs.
• The P/V ratio is the ratio of contribution to sales. It represents the relationship
between contribution and turn-over.
• So, it is a measure to compare profitability of different products. Higher the PN
ratio, the high yielding is the product. Mathematically,
 BREAK-EVEN ANALYSIS

Uses of P/V ratio:

• The P/V ratio can be used to
study a variety of problems
viz.,
• i. To determination of B.E.P.
• ii. To know profit for given
sales volume.
• iii. To know sales volume for
achieving some desired
profit.
P/V ratio can be increased by:
(a) Increasing the selling price.
(b) Changing the mix of sales.
(c) Reduction in variable costs.
 BREAK-EVEN ANALYSIS
DEMONSTRATION OF BREAK-EVEN CHART Sales income
line
• The break-even chart can be Total cost
demonstrated by the following line
example:
• Volume of sales (units)
• Sales at Rs. 10/unit
5000 10000 15000 20000
• Fixed cost (Rs.) 60000 60000 60000
60000
• Variable costs - Rs. 6 per unit
• The data can now be shown graphically
as follows:
• From the figure it can be seen that the
break-even point occurs when sales are
15000 units, or Rs. 150000.
• Margin of safety = Actual sales - Break
even sales = 20,000 15,000 = 5000
units.
 BREAK-EVEN ANALYSIS
• EFFECT OF INCREASE
OR DECREASE IN
FIXED COST AND
VARIABLE COSTS ON
B.E.P.
• An increase in fixed
cost increases the
total cost and shifts
B.E.P. towards right-
hand side.
• It shows that
increase in fixed cost
reduces the margin
of profit.
 BREAK-EVEN ANALYSIS
• EFFECT OF INCREASE OR
DECREASE IN SALES PRICE ON
BEP
• An increase in the sales price
increases the sales income
and a new sales income line,
has a greater slope.
• This shifts the BEP towards
left hand side and increases
the profit for the same
output.
• Decrease in sales income
shifts the BEP towards right
hand side and reduces the
profit for the same output.
 BREAK-EVEN ANALYSIS
MANAGERIAL USES OF BREAK-EVEN CHART
• Management can employ break-even chart to project the cost and income picture under
various anticipated future conditions and for alternative business programs.
• Hence, the chart is useful to the management.
1. To show the relative importance of different classes of costs, how they vary with volume of
production, and how they may be controlled.
2. To show the impact of changes in sales volume on profits.
3. To predict the effect of price and cost changes on the break-even point.
4. To show the gain needed in sales volume (or productivity) to maintain profits when prices or
costs change in a specific way e.g. when prices decline but wages and the cost of material do
not.
5. To select the proper size plant or to predict the effect of changes in plant size plant on the
break-even point. Therefore, through break-even chart management can estimate what amount
of investment in plant capacity is economically justified for the projected volume of sales.
6. To compare the profitability of two or more firms.
 BREAK-EVEN ANALYSIS

LIMITATIONS OFBREAK-EVEN CHART ANALYSIS

1. In practice all the costs are not always either fixed costs
or variable costs. There are some semi-variable overhead
costs.
2. In the long run all costs are variable, so the break-even
analysis holds good only for short run requirements.
3. Break even analysis assumes, that profits are a function
of output ignoring the fact that they are also affected by
technological changes, improved management,
improvement in quality, versatility etc.
4. It is suitable only when the firm produces one type of
product.
 BREAK-EVEN ANALYSIS
CALCULATION OF BREAK-EVEN POINT
The break-even point can be calculated
in terms of physical units and in terms of
sales turnover.
• i. In terms of Physical units:

The number of units produced (volume

of production) to achieve the break-even
point can be calculated by the formula
• Where, FC = Fixed cost;
• VC = Variable cost per unit;
• SP = Sales price per unit;
• C = Contribution per unit (C = SP - VC)
 BREAK-EVEN ANALYSIS
• ii. In terms of rupees of sales revenue

• iii. If a banker provides term loan to an industrial unit, the formula for
B.E.P. from banker's point of view may be as follows

•
 BREAK-EVEN ANALYSIS
• The banker can estimate the repayment capacity of the concern through the
comparison of projected marketing conditions of the firm with the volume of
sales needed to attain target profit. Break-even analysis may be utilized to
determine the volume of sales needed to achieve target profit.