Break-even Analysis useful for Certified credit professionals

Break-even Analysis : Break even point can be defined as the business volume that balances total costs with total gains. At break even volume, in other words, cash inflows equal cash outflows, exactly, and net cash flow equals zero. Break even analysis In the simple analysis, break even is the quantity (unit volume) that balances total costs with total gains for a net cash flow of 0. The break even quantity depends on at least three variables: Fixed cost, variable cost per unit, and revenues per unit. Break even analysis attempts to find break even volume by analyzing relationships between fixed and variable costs on the one hand, and business volume, pricing, and net cash flow on the other. Understanding how these factors impact each other is crucial in budgeting, production planning, and profit forecasting, And, break even analysis, is central to this understanding. The basic components of simple break even analysis include:  Cash inflows (or revenues).  Fixed costs.  Variable costs.

Cash inflows The simple analysis assumes that each unit brings the same cash inflow. This usually means the unit selling price. Fixed costs Fixed costs remain fixed, or constant, regardless of unit volume. For example, if the costs of floor space, manager's salaries, and janitorial services, do not change with volume, they are fixed costs.

Variable costs

These costs vary in direct proportion to quantity sold or unit volume. Variable costs for

selling goods, for instance, might include the direct cost the seller pays to acquire each

unit. As a result, the total variable cost can be simply cost per unit multiplied by

the unit volume.

Types of Break even

Break even point as unit volume

In business, break even point usually means the unit volume that balances total costs

with total gains. For the analyst, break even is the quantity Q for which cash outflows

equal cash inflows, exactly. At the break even quantity, therefore, net cash flow equals

zero.

Simple break even analysis finds Q by analyzing relationships between just three

variables: fixed costs, variable costs, and cash inflows. The analysis must consider

additional factors, however, when semi-variable costs or variable pricing are present.

Break even point as a time period

Note that business people also refer to a similar but different concept, the break even

point in time, or payback period. Payback period is the time necessary for investment

returns to cover investment costs. Payback analysis does not consider units, but instead

the timing of cash inflows and outflows. For more on the break even point in time,

see Payback period.

Break even points for business start up

Business people starting a new business need especially to understand both kinds of

break even points (break even time and break even unit volume). This is because start

ups typically lose money for a while before becoming profitable. There is a limit,

however, to the time owners can tolerate losses.

Break-EvenAnalysis: Problem with Solution # 1. 

Fromthe following particulars, calculate:

(i) Break-even point in terms of sales value and in units.
(ii) Number of units that must be sold to earn a profit of Rs.90,000.

Break-EvenAnalysis: Problem with Solution # 2 

Fromthe following data, you are required to calculate break-even point and net sales value at this point:

If sales are 10% and 25% above the break even volume, determine the net profits.

Break-Even Analysis: Problem with Solution # 3

From the following particulars, find out the break-even-point:

What should be the selling price per unit, if the break-even

point should be brought down to 6,000 units?

Break-Even Analysis: Problem with Solution # 4. 

The fixed costs amount to Rs. 50,000 and the percentage of variable costs to sales is given to be 66 ⅔%.If 100%capacity sales are Rs. 3,00,000, find out the break-even point and thepercentage sales when it occurred. Determine profit at 80% capacity:

Break-EvenAnalysis: Problem with Solution # 5. 

Fromthe following information, ascertain by how much the value of sales must be increased by the company to break-even:

Break-Even Analysis: Problem with Solution # 6 

Calculate:

(i) The amount of fixed expenses.

(ii) The number of units to break-even.

(iii) The number of units to earn a profit of Rs. 40,000.

The selling price per unit can be assumed at Rs. 100.

The company sold in two successive periods 7,000 units and 9,000 units and has incurred a loss of Rs. 10,000 and earned Rs. 10,000 as profit respectively.Solution:

Break-EvenAnalysis: Problem with Solution # 7

Acompany is making a loss of Rs. 40,000 and relevant information is as follows:

Sales Rs. 1,20,000; Variable Costs Rs. 60,000; Fixed costs Rs. 1,00,000.

Loss can be made good either by increasing the sales price or by increasing sales volume. What are Break even sales if

(a) Present sales level is maintained and the selling price is increased.

(b) If present selling price is maintained and the sales volume is increased. What would be sales if a profit of Rs. 1,00,000 is required ?

Solution: