Scribd Logo
Upload

Welcome to Scribd!

  • 144 views

    Mechanics of Break Even Analysis

    Uploaded by

    Geetanjali Bonde
    This document discusses break even analysis and how changes in key variables like sales volume, fixed costs, selling price, and variable costs impact break even point, margin of safety, and profit. Some key effects noted are: 1. When fixed costs decrease, break even point and margin of safety increase while profit also increases. 2. When sales volume or selling price increase, break even point, margin of safety, and profit all increase as well. 3. Increases in variable costs or fixed costs cause break even point and margin of safety to rise while profit decreases.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX or read online from Scribd

    Mechanics of Break Even Analysis

    Uploaded by

    Geetanjali Bonde
    144 views9 pages
    This document discusses break even analysis and how changes in key variables like sales volume, fixed costs, selling price, and variable costs impact break even point, margin of safety, and profit. Some key effects noted are: 1. When fixed costs decrease, break even point and margin of safety increase while profit also increases. 2. When sales volume or selling price increase, break even point, margin of safety, and profit all increase as well. 3. Increases in variable costs or fixed costs cause break even point and margin of safety to rise while profit decreases.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOCX or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses break even analysis and how changes in key variables like sales volume, fixed costs, selling price, and variable costs impact break even point, margin of safety, and profit. Some key effects noted are: 1. When fixed costs decrease, break even point and margin of safety increase while profit also increases. 2. When sales volume or selling price increase, break even point, margin of safety, and profit all increase as well. 3. Increases in variable costs or fixed costs cause break even point and margin of safety to rise while profit decreases.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX or read online from Scribd
    Download as docx
    144 views9 pages

    Mechanics of Break Even Analysis

    Uploaded by

    Geetanjali Bonde
    This document discusses break even analysis and how changes in key variables like sales volume, fixed costs, selling price, and variable costs impact break even point, margin of safety, and profit. Some key effects noted are: 1. When fixed costs decrease, break even point and margin of safety increase while profit also increases. 2. When sales volume or selling price increase, break even point, margin of safety, and profit all increase as well. 3. Increases in variable costs or fixed costs cause break even point and margin of safety to rise while profit decreases.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX or read online from Scribd
    Download as docx
    of 9

    MECHANICS OF BREAK EVEN ANALYSIS

    Revenue

    Total Cost (TC) Profit R e v e n u e BEP

    Loss Margin of Safety

    Fixed Cost (F)

    Break Even Sales

    Operating Sales

    Volume of Business Figure: Factors influencing Break Even Point

    1. Contribution = [Sales price per unit] [Variable Cost per unit] Gross Contribution (C) = [Total Revenue(S)] [Total Variable Cost (V)] Gross Contribution = Fixed Cost + Price 2. Profit Volume Ratio P/V Ratio = [Contribution per Unit / Selling Price per Unit] = [Gross Contribution / Total Revenue] = 1 (V/S) 3. Margin of Safety MS = [(Operating Sales Break even Sales) / Operating Sales]* 100 4. Break Even Sales (Q0) Q0 = [F / P/V Ratio] = [F/1 (V/S)]

    5. Operating Sales (Q) Q = [(F + P) / P/V Ratio] = [(F+ P) /1 (V/S)] 6. Profit Formulae P = Q (F+VC) = Q* {(P/V Ratio)} F = (Q - Q0) * (P/V Ratio) = Sales (Fixed Cost + Variable Cost)

    EFFECT OF CHANGES IN SALES VOLUME Decrease in Volume by 10% 45,000 1,80,000 90,000 80,000 1,60,000 0.5 10,000 12.50% Increase in Volume by 10% 55,000 2,20,000 1,00,000 80,000 1,60,000 0.5 30,000 37.50%

    Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

    Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 25%

    Revenue

    Added Profit R e v e n u e BEP

    Total Cost (TC)

    Variable Cost (V)

    Loss

    Fixed Cost (F) Margin of Safety

    0
    Volume of Business

    Break Even Sales

    Operating Sales (old)

    Operating Sales (new)

    Figure: Change in Sales Volume

    EFFECT OF CHANGES IN FIXED COSTS Decrease in Volume by 10% 50,000 2,00,000 1,00,000 72,000 28,000 0.5 1,44,000 38.00% Increase in Volume by 10% 55,000 2,00,000 1,00,000 88,000 12,000 0.5 1,76,000 13.63%

    Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

    Normal Value 50,000 2,00,000 1,00,000 80,000 20,000 0.5 1,60,000 25%

    Revenue

    BEP

    TC

    TC
    R e v e n u e

    Added Profit

    BEP

    FC
    Margin of Safety (MS)

    FC
    Margin of Safety(MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Change in Fixed Cost

    Revenue TC
    BEP

    TC
    R e v e n u e

    Drop in Profit

    BEP

    FC
    Margin of Safety (MS)

    FC
    Margin of Safety(MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Change in Fixed Cost

    INFERENCES: 1. 2. 3. 4. 5. 6. Margin of Safety increases, Fixed Cost reduces. Margin of Safety reduces Fixed Cost increases. BEP reduces, Fixed Cost reduces. BEP increases, Fixed Cost increases. Profit increases, Fixed cost reduces. Profit reduces Fixed Cost increases.

    EFFECT OF CHANGES IN SELLING PRICE Decrease in Volume by 10% 50,000 1,80,000 1,00,000 80,000 1,81,818 0.44 0 -1.00% Increase in Volume by 10% 50,000 1,80,000 1,00,000 80,000 1,45,455 0.55 40,000 -23.70%

    Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

    Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 -25%

    Sales

    Sales

    Added Profit TC

    BEP BEP Margin of Safety (MS)

    FC

    Margin of Safety(MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Change in Selling Price

    Sales

    Sales

    TC

    Drop in Profit
    BEP BEP Margin of Safety(MS)

    FC
    Margin of Safety(MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Changes in Selling Price

    INFERENCES: 1. Direct effect on P/V ratio due to changing angle of incidence Selling Price decreases, P/V ratio increases 2. Margin of safety Margin of safety increases, revenue increases. Margin of safety reduces, revenue reduces. 3. Profit Profit increases, sales increases. Profit reduces, sales reduces.

    EFFECT OF CHANGES IN VARIABLE COST Decrease in Volume by 10% 50,000 2,00,000 90,000 80,000 1,45,455 0.55 30,000 -1.00% Increase in Volume by 10% 50,000 2,00,000 1,10,000 80,000 1,77,778 0.45 10,000 -23.70%

    Element Sales Volume (units) Sales Amount (Q) Variable Cost (V) Fixed Cost (F) Break Even Sales P/V Ratio Profit Margin of Safety

    Normal Value 50,000 2,00,000 1,00,000 80,000 1,60,000 0.5 20,000 -25%

    Revenue TC
    BEP

    TC
    R e v e n u e

    Drop in Profit

    BEP
    Margin of Safety (MS)

    FC

    Margin of Safety(MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Change in Variable Cost

    Revenue TC
    BEP

    TC
    R e v e n u e

    Added Profit

    BEP

    FC
    Margin of Safety(MS)
    Margin of Safety (MS)

    Volume of Business

    Operating Sales(Q)

    Figure: Change in Variable Cost

    INFERENCES: 1. 2. 3. 4. 5. 6. 7. 8. Margin of Safety increases, Variable Cost reduces. Margin of Safety reduces Variable Cost increases. Variable Cost decreases, BEP decreases. Variable Cost increases, BEP increases. Profit increases, Variable cost reduce. Profit reduces, variable cost increases. P/V Ratio increases, Variable cost reduces. P/V Ratio decreases, variable Cost increases

    You might also like