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16. Breakeven Analysis

BREAKEVEN ANALYSIS

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2 views

16. Breakeven Analysis

BREAKEVEN ANALYSIS

Uploaded by

muhammadwajidali2001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ENGINEERING ECONOMICS

INSTRUCTOR: Adnan Ahmad

1
BREAK EVEN ANALYSIS-2

2
BREAK EVEN ANALYSIS

IMPORTANCE OF BREAK EVEN


ANALYSIS FOR AN INDUSTRY

It helps in determining
• The optimum level of output.

• Minimum cost for a given level of output.

• Selling price for a product.

• The target capacity of an industry to get the benefit of


minimum per unit production cost.

• Establishing the point from where the industry can start


paying dividend to share holders.
BREAK EVEN ANALYSIS

IMPORTANCE OF BREAK EVEN


ANALYSIS FOR AN INDUSTRY

• It helps in analyzing:
• Impact of new product launch.

• Impact of purchasing new capital equipment.

• Should one make, buy or lease capital equipment.

• Revenue and cost implications of changing the process of


production.

• Impact of changes in price and cost on profit of the industry.


BREAK EVEN ANALYSIS

BREAK EVEN POINT

• Number of units that must be sold in order to produce a profit


of zero (but will recover all associated costs).

• Break Even Point (IN UNIT)= Fixed Cost / (S. Price -


Variable Unit Cost)

• Break Even Point (in Rs)=Fixed Cost / (S. Price - Variable


unit Cost * Units)
BREAK EVEN ANALYSIS

BREAK EVEN POINT: EXAMPLE

• For example, suppose that your fixed costs for producing


100,000 product were RS.30,000 a year.

• Your variable costs are Rs.2.20 materials, Rs.4.00 labor, and


Rs.0.80 overhead, for a total of Rs.7.00 per unit.
• If you choose a selling price of Rs.12.00 for each product,
then: 30,000 divided by (12.00 - 7.00) equals 6000 units.
• This is the number of products that have to be sold at a
selling price of Rs.12.00 before your business will start to
make a profit.
BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS


BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS


BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS


BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS


BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS


BREAK EVEN ANALYSIS

USES OF BREAK EVEVN POINT

• Helpful in deciding the minimum quantity of sales

• Helpful in the determination of tender price

• Helpful in examining effects upon organization’s


profitability

• Helpful in deciding about the substitution of new plants

• Helpful in sales price and quantity

• Helpful in determining marginal cost


BREAK EVEN ANALYSIS

LIMITATIONS

• Break-even analysis is only a supply side (costs only)


analysis, as it tells you nothing about what sales are
actually likely to be for the product at these various
prices.

• It assumes that fixed costs (FC) are constant

• It assumes average variable costs are constant per unit of


output, at least in the range of likely quantities of sales.
BREAK EVEN ANALYSIS

LIMITATIONS

• It assumes that the quantity of goods produced is equal to


the quantity of goods sold (i.e., there is no change in the
quantity of goods held in inventory at the beginning of
the period and the quantity of goods held in inventory at
the end of the period.

• In multi-product companies, it assumes that the relative


proportions of each product sold and produced are
constant.
BREAK EVEN ANALYSIS

THANK YOU

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