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    CCM Final

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    Aman Siddiqui
    Break-even analysis determines the sales volume needed for a company to cover its total costs. It is useful for decision making and calculating the break-even point, which is the sales level where revenue equals total costs. Contribution margin analysis separates costs into fixed and variable components to calculate break-even sales. Companies use break-even analysis to compare product profitability, understand their cost structures, and set target profits.

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    CCM Final

    Uploaded by

    Aman Siddiqui
    130 views18 pages
    Break-even analysis determines the sales volume needed for a company to cover its total costs. It is useful for decision making and calculating the break-even point, which is the sales level where revenue equals total costs. Contribution margin analysis separates costs into fixed and variable components to calculate break-even sales. Companies use break-even analysis to compare product profitability, understand their cost structures, and set target profits.

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    Break-even analysis determines the sales volume needed for a company to cover its total costs. It is useful for decision making and calculating the break-even point, which is the sales level where revenue equals total costs. Contribution margin analysis separates costs into fixed and variable components to calculate break-even sales. Companies use break-even analysis to compare product profitability, understand their cost structures, and set target profits.

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    Download as pptx, pdf, or txt
    130 views18 pages

    CCM Final

    Uploaded by

    Aman Siddiqui
    Break-even analysis determines the sales volume needed for a company to cover its total costs. It is useful for decision making and calculating the break-even point, which is the sales level where revenue equals total costs. Contribution margin analysis separates costs into fixed and variable components to calculate break-even sales. Companies use break-even analysis to compare product profitability, understand their cost structures, and set target profits.

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    BREAK EVEN ANALYSIS IS

    RELEVENT FOR DECISION


    MAKING

    TEAM MEMBERS
    PRIYA SINGH
    SRISHTI KESHRI
    NAINA MITTAL
    RISHA SINGH
    ARVIND KRISHNA
    AAMIR RAZA
    SAGAR SINGHAL
    Break Even Analysis
    What is BREAKEVEN
    ANALYSIS?
    A break-even analysis is a financial tool which helps
    you to determine at what stage your company, or a
    new service or a product, will be profitable.
    In other words, it’s a financial calculation for
    determining the number of products or services a
    company should sell to cover its costs (particularly
    fixed costs).
    Break-even is a situation where you are neither
    making money nor losing money, but all your costs
    have been covered.
    Break-even analysis is useful in studying the relation
    between the variable cost, fixed cost and revenue.
    Generally, a company with low fixed costs will have
    a low break-even point of sale.
    Components of Break Even Analysis
    • Fixed costs
    • Variable costs
    • Revenue
    • Profit
    How to CALCULATE BEP?
    Assumptions of Break
    Even Analysis
    (i) The total costs may be
    classified into fixed and
    variable costs. It ignores
    semi-variable cost.
    (ii) The cost and revenue
    functions remain linear.
    (iii) The price of the product is
    assumed to be constant.
    (iv)The volume of sales and
    volume of production are
    equal.
    (v) The fixed costs remain
    constant over the volume
    under consideration.

    (vi) It assumes constant rate


    of increase in variable cost.

    (vii) It assumes constant


    technology and no
    improvement in labour
    efficiency.
    Contribution Margin
    Analysis
    What is Contribution?
    "Contribution" represents the portion of sales revenue that is not consumed by
    variable costs and so contributes to the coverage of fixed costs. This concept is
    one of the key building blocks of break-even analysis.
    Formula : The Unit Contribution Margin (C) is Unit Revenue (Price, P) minus Unit
    Variable Cost (V):
    C=P−V
    Contribution Margin Shown in
    Cost Chart in Yellow Colour.

    Contribution Margin Shown in


    Break Even Chart in Blue Colour.
    • Beta Sales Company Contribution Format Income Statement For Year Ended
    December 31, 201X

    Sales $ 462,452
    Less Variable Costs
    Cost of Goods Sold $ 230,934
    Sales Commissions $ 58,852
    Delivery Charges $ 13,984
    Total Variable Costs ($ 303,770)
    Contribution Margin (34%) $ 158,682
    Less Fixed Costs
    Advertising $ 1,850
    Depreciation $ 13,250
    Insurance $ 5,400
    Payroll Taxes $ 8,200
    Rent $ 9,600
    Utilities $ 17,801
    Wages $ 40,000
    Total Fixed Costs ($ 96,101)
    Net Operating Income $ 62,581
    How Do Companies Use It?
    1. To compare products and determine which to keep and which to
    get rid of.
    2. Helps in understanding cost structure of businesses.
    3. Helps in managing Product portfolios of companies and it’s costs.
    4. Helps in differentiating between fixed costs and variable costs.
    Target Profit
    • With the Help of contribution analysis we can find out the
    units which need to be produced for reaching a specified
    target profit.
    • Formula :
    Example

    • The HK company manufactures a single product – product X. A unit


    of product X is sold to customers for $80. The per unit variable
    expense and the total expected fixed expenses for the year 2012 are
    as follows:
    • Variable cost per unit: $50
    • Total fixed expenses: $40,000
    • The company wants to earn a profit of $80,000 for the year 2012.

    Answer :
    Contribution margin method:
    (Target profit + fixed expenses)/contribution margin per unit
    = ($40,000 + $80,000) / $30*
    = 4,000 units
    Margin Of Safety
    The margin of safety is the amount of sales over a company’s break-even
    point. In other words, the margin of safety is the amount of sales a company
    can lose before it actually starts to lose money or stops making a profit.
    MOS in Break Even Chart
    Ways to improve Margin of safety

    1. Increase contribution per unit: By increasing selling price or


    lowering the variable cost
    2. Lowering Break-even Output: By reducing the Fixed
    overheads
    3. Increasing sales volume: The easiest technique to increase
    the margin of safety is to sell as much as the company can if
    there is underutilized capacity.
    Difference between Breakeven Point vs. Margin of
    Safety

    • Break-even point (BEP) is the level of sales where a total of fixed


    and variable cost equals total revenues. In other words, the
    breakeven point is a level where the company neither makes profit
    nor loss.
    • A margin of safety (MoS) is a difference between actual/budgeted
    sales and level of breakeven sales.
    CONCLUSION
    1. Break-even analysis has a huge effect in planning , controlling and
    in the decision making.
    2. break-even analysis is a very important and useful tools of
    financial management and control.
    3. Break-even analysis determines the relationship between costs
    and production volume to forecast profit accurately at various
    levels of operations.

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