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Engg. Economics Module-3

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9 views

Engg. Economics Module-3

Uploaded by

subhash
Copyright
© © All Rights Reserved
Available Formats
Download as KEY, PDF, TXT or read online on Scribd
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Module-3

Break-Even Depreciati
Analysis: on:
Break-
Even
Assumptions, break-even charts, simple
problems.
Analysis:
Depreciati
on:
Depreciation methods - Introduction, Straight line method of
depreciation, declining balance method of depreciation-Sum of the
years digits method of depreciation, sinking fund method of
depreciation/ Annuity method of depreciation, service output
method of depreciation-Simple problems.
Break-Even
Analysis:

In 1930’s Walter Rautenstrauch, an industrial engineering and


professor of Columbia University, invented the planning device
known as a Breakeven Chart.
It was the 1st synthetic tools that became available to Production
Management and Management Accountancy.
Functions (Scope) of Break-
Even Analysis:
A BEA chart is an aid to management and it depicts a clearer view of
the position of a business.
It is one of the most useful graphic presentation of accounting data.

It is a graphic presentation of an economics rather than an


accounting concept.
It portrays likely profits or losses at various output levels.
It depicts relationship between marginal costs and fixed costs.

It marks no profit no loss situation.


It portrays margin of safety.
It can help make specific plans to effect profit through the control of
It can nicely sum up the impact of alternative decisions on costs and
expenses.
It is a decision making tool in the hands of management.
profits.
Break-Even
Definiti Analysis:
on:
A breakeven is a graphical representation of the relationship
between costs and revenue at a given time.
It is graphical device to determine the breakeven point and profit
potential under varying conditions of output and costs.
Break-Even
Constru Analysis:
ction: Reven
ue

Breakeve
Sales Total
n Point �
RevenueCost
Variable
Cost
�
* Margin
of
R Safety
u Fixed
p Cost
e
e
s Units of output
Interpretation and Analysis of a
Breakeven Chart
1. The BEP marking shows no profit no loss situation for a given volume
of production.
1. The area between the total cost line and revenue line on the left-hand
side of the BEP marks loss to the concern whereas the area between
the same lines on the right-side of the BEP represents profit to the
enterprise or concern.

1. Profit appears only when more than a minimum volume of output is


reached. Profit increases at a faster rate than do total cost.
1. Effect of an increase in fixed
costs:
New Reven
Breakeven ue
Point New Total Cost

Breakeve
n Point
* Total
Cost

* New Fixed
Cost
R
u
Fixed
p
Cost
e
e
s Units of output
1. Effect of an increase in
Variable costs:
Reven
ue
New
Breakeven New Total Cost
Point
Breakeve Total
n Point
* Cost

*
R
u Fixed
p Cost
e
e
s Units of output
1. Effect of an increase in sales New
price: Revenue
Reven
ue
Breakeven
Point

Total
New Cost
Breakeven
Point
*
*
R
u Fixed
p Cost
e
e
s Units of output
Margin of
Safety:
Margin of safety can be presented on the break even chart as the
distance between BEP and the output being produced.

If this distance is large, it indicates that profits will be there even if


there is a serious group in production.

If this distance is relatively small, it hints that profits will be reduced


considerably even if there is a small droup in production capacity or
sales.
Margin of safety may be expressed in monetary terms or as a
percentage.
Angle of Revenue
incidence:

This is the angle(𝞱) at Breakeven Point


which sales revenue
Sales Revenue
Total Cost

𝞱 Variable Cost
line cuts the total cost
line.
* Margin of Safety

Rupees

A larger angle Fixed Cost

indicates that profits


are being made at a
high rates.
Units of output

A larger angle of incidence with a high margin of safety, mark the


extremely favourable business position.
Limitations of Break-Even
The Analysis:
breakeven point is difficult to determine in many instances
because of the difficulty in properly classifying costs as either fixed or
variable and because market conditions may not remain constant over
the range of projected capacity.
The breakeven chart is the tool for short run analysis, it cannot be
used for 8 to 10 years projections because of the difficulty of
indication variables in each of the costs line on the chart.

The total cost line, representing the variable costs added to fixed
costs, need not be straight line, in actual fact, cost do not usually
varying direct proportion.
The straight line which represents sales revenue may also
misrepresent the true facts.
The breakeven chart represents a static picture whereas business
operations are far from static.
Additional difficulties if a company have variety of products.

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