Assignment-2 Breakeven Analysis

Break Even Analysis

INTRODUCTION-108 Purnima Mehta(B)

Break-even analysis focuses on the relationship between fixed cost, variable cost , and selling price

Fixed Costs -Cost that do not change when production or sales levels do change, such as rent, property tax, insurance, or interest expense.

Variable Cost (Per Unit Cost) - Variable costs are costs directly related to production units. Typical variable costs include direct labor and direct materials.

Selling Price (per unit price) - The price that a unit is sold for. The Selling Price times the number of units sold equals the Total Sales.

Break Even Point - The sales volume (express as units sold) at which the company breaks even. Profits are $0 at the break even point. The break even point is calculated by the following formula:

Break Even Point = Fixed Costs / (selling price-variable costs).

Unit Contribution Margin = Sales Price - Variable Costs

Frankly, predicting a precise amount of sales or profits is nearly impossible due to a company's many products (with varying degrees of profitability), the company's many customers (with varying demands for service), and the interaction between price, promotion and the number of units sold. These and other factors will complicate the break-even analysis.

DISCUSSION- 49 Monika(A)

Assume the following:

Fixed Costs:
Monthly Rent		$100
Insurance ($600 per year $600/12 months = $50)		$50
Total Monthly Fixed Costs		$150
Variable Cost:
Materials		$3
Labor		$4
Total Variable Cost		$7
Selling Price:		$10
Break Even Point Calculation
Break Even Point =	Fixed Costs / (selling price - variable costs)
Break Even Point =	$150 / ($10-$7)
Break Even Point =	$150 / $3
Break Even Point =	50
To break even the company must sell 50 units per month.

If the Company just broke even, then its Profit and Loss Statement would look like the following:

Monthly Profit and Loss Statement
Sales
Gross Sales	($10 per unit times 50 units)	$500
Less Cost of Goods Sold	($7 per unit times 50 units)	$350
Net Sales		$150
Expenses
Rent		$100
Insurance		$50
Total Expense		$150
Net Profit		$0

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point"

CONCLUSION- 176 Sumit mahajan(c)

Use this analysis every time you plan to make a major change in the business. These include:

· Adding a new product

· Expanding the business

· Taking on significant debt

· Entering a long-term contract (with either a supplier or customer)

· Setting or changing prices

Prepare a break-even before you definitively decide to make such a major change. This will let you know whether that change can be profitable or not. Break-even analysis is a powerful tool you can use to determine whether your business idea will be profitable.. Even if this analysis shows that you can make a profit given your expected sales and costs, there are other tools you will use in your business plan to give you a fuller picture of your financial forecasts. Among them are:

• A profit and loss statement

• A cash flow projection

• A start-up cost estimate

REFERENCES:

We have reffered Accounting coach.com for the detailed study of the topic.

We have also reffered TR JAIN’S economics book of BCOM-3^rd year for diagram explanation.