BE and timevalue of money.pptx

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Break-even Analysis

Jibran Hussain



In economics & business, specifically cost accounting,

the break-even point (BEP) is the point at which cost

or expenses and revenue are equal: there is no net loss

or gain, and one has "broken even.“

A profit or a loss has not been made, although

opportunity costs have been "paid," and capital has

received the risk-adjusted, expected return.



BREAKEVEN ANALYSIS

TOTAL COST CURVES:

COSTS

AVERAGE COST CURVES:

COSTS

FIXED COSTS

VARIABLE COSTS

TOTAL COSTS

QUANTITY

QUANTITY

AVERAGE TOTAL COSTS

AVERAGE VARIABLE COSTS

AVERAGE FIXED COSTS



Break - Even Analysis

B.E. Point = Fixed CostsSelling prie!unit - "ariable Cost!unit

BREAKEVEN POINT:

TR = TC

TR = VC + FC

(UNITS)($/UNIT) = (UNITS)($/UNIT) + FC

PRICE COST



#$y alulate break-even%

Ali can hire an icecrea! "an #r an a#%ernn

a% a &'!!er The "an hire ill *e R&,, an-

%he c&% # crne%&. ice crea! e%c

,0 0er ice crea!

Ali %hin1& a &en&i*le &ellin2 0rice ill *e R&,

A% %hi& 0rice. h !an3 icecrea!& !'&% he &ell % c"er hi& c&%&4

Calc'la%in2 %hi& ill hel0 Ali % -eci-e i# %he i-ea

i& r%hhile



I-en%i#3in2 %he *rea1e"en 0in%

Loss

Profit

Brea!e"e# $oi#t



Applying t$e &or'ula

Fixed costs

(Selling price per unit minus variable cost per unit)

A%i : £100

(£1.50 – 50p)= &''



Break - Even Analysis ()evenues*

N'!*er # 'ni%& 0r-'ce- an- &l-

$ # Sale&

an- C&%&

T%al Re"en'e

5ineThe &l0e # %he

re"en'e line i&

-e%er!ine- *3 %he

0rice %ha% 3' &e%

#r 3'r 0r-'c%

r &er"ice

6

$6,

$,

Sale& re"en'e

hen 0rice 0er

'ni% i& $,,,



N'!*er # 'ni%& 0r-'ce- an- &l-

$ # Sale&

an- C&%&

T%al Re"en'e

5ine +$e slope o& t$erevenue line isdeter'ined by t$eprie t$at you set&or your produtor servie.

6

$6,

$,Sales revenue,$en prie perunit is .//.

Brea1 E"en Anal3&i& (Re"en'e&)



Break Even )evenue C$art

$ # Sale&

an- C&%&

7 # 'ni%& 0r-'ce- an- &l-

T%alRe"en'e

T%al C&%&

Fi8e- C&%&

Brea1 E"en Pin%

in Uni%&

TR = TC



• PROBLE(:

– SELECT A PRICE OF )&' OR )&* FOR PRODUCT +X,

• FACTS: – F01E2 C3S+ = 4/5///

– "A)0AB6E C3S+ PE) 780+ = 4.//

– 2E9A82 0S 60:E6; +3 BE<

• = >?5/// 780+S S362 @ >/.//

• = >5/// 780+S S362 @ >.//



BREAKEVEN ANALYSIS EXA(PLE

DE(AND CURVE:

&-

&'

-

'

' - &' &- QUANTITY .K/

PRICE

DE(AND:&01''' UNITS 2 )&'

&*1''' UNITS 2 )&*

TR .2 )&'/ 3 &' X &01''' 3 )&0'1'''TR .2 )&*/ 3 &* X &*1''' 3 )&001'''



CONTRIBUTION TO FIXED COST PROCESS:

2 )&'4'' 2 )&*4''

)5'1''' 6)04'' 3 &-1''' UNITS )5'1''' 6 )54'' 3 &'1''' UNITS

DE(ANDED UNITS:

&01''' UNITS &*1''' UNITS

BREAKEVEN GREATER T7AN BREAKEVEN LESS T7ANDE(AND ! LOSE (ONEY DE(AND ! (AKE PROFIT



Break-even analysis<Break-even point

• Ali &ell& a 0r-'c% #r $, an- i% c&% $ % 0r-'ce

Uni% Varia*le C&% (UVC) an- ha& #i8e- c&% (FC) #

$6.,,, 0er 3ear

• 9 !'ch ill he nee- % &ell % *rea1e"en4

• 9 !'ch ill he nee- % &ell % !a1e $,,,4



Algebrai approa$<Basi euation

)evenues "ariable ost Fixed ost = 30

(7SP x * (7"C x * FC = 30

>/ - 5/// = /.// = 5///

= 5///

#$at uantity de'and ,ill earn >5///%>/ - - 5/// = >5///

= 45///

= 5//



Drap$ial analysis

Dollars

/5///

4/5///

/5///

?/5///

/5///

/5///

>/5/// Break-

even point /

>/// /// /// ?/// /// 4///

uantity

T%al Re"en'e 5ine

T%al C&% 5ine



Drap$ial analysis<Cont.

Dollars

/5///

4/5///

/5///?/5///

/5///

/5///

>/5/// Break-even point

/

>/// /// /// ?/// /// 4///

uantity

T%al C&% 5ine

T%al Re"en'e 5ine



Break-even Analysis< Co'paring diGerent variables

• Co'pany 1; $as to $oose bet,een t,o'a$ines to pur$ase. +$e selling prie is>/ per unit.

• 9a$ine A< annual ost o& /// ,it$ perunit ost ("C* o& .

• 9a$ine B< annual ost o& I/// ,it$ perunit ost ("C* o& .



Break-even analysis<Co'parative analysis Part >

• 2eter'ine break-even point &or 9a$ine Aand 9a$ine B.

• #$ere< " = FC

SP - "C



Break-even analysis<

9a$ine A<

v = 5///

>/ -

= 4// units

9a$ine B<

v = I5///

>/ - = >/// units



Part >< Co'parison

• Co'pare t$e t,o results to deter'ine

'ini'u' uantity sold.

• Part > s$o,s<

– 4// units are t$e 'ini'u'.

– 2e'and o& 4// you ,ould $oose

9a$ine A.



Part < Co'parison

Fin-in2 0in% # in-i##erence *e%een achine A an- achine B

ill 2i"e %he ;'an%i%3 -e!an- re;'ire- % &elec% achine B "erachine A

achine A = achine B

FC + VC= FC + VC

$<.,,, + $ = $>.,,, + $6

$< = $.,,,

= ??@



Part < Co'parisonCont.

• Knin2 %he 0in% # in-i##erence e ill ch&e:

• achine A hen ;'an%i%3 -e!an-e- i& *e%een ?,,

an- ??@

• achine B hen ;'an%i%3 -e!an-e- e8cee-& ??@



Part < Co'parisonDrap$ially displayed

Dollars

>5///

>I5///

>5///

>5///

5///

45///

5////

// >/// >// /// // ///

uantity

achine A

achine B



Part < Co'parisonDrap$ially displayed Cont.

Dollars

>5///

>I5///

>5///

>5///

5///

45///

5/// Point o& indiGerene

/

// >/// >// /// // ///

uantity

achine A

achine B



Break-Even Analysis

C&%&/Re"en'e

O'%0'%/Sale&

Ini%iall3 a #ir!

ill inc'r #i8e-

c&%&. %he&e -

n% -e0en- n

'%0'% r &ale&

FC

A& '%0'% i&

2enera%e-. %he#ir! ill inc'r

"aria*le c&%&

%he&e "ar3 -irec%l3

i%h %he a!'n%

0r-'ce-

VCThe %%al c&%&%here#re

(a&&'!in2

acc'ra%e

#reca&%&) i& %he

&'! # FC+VC

TC T%al re"en'e i&-e%er!ine- *3 %he

0rice char2e- an-

%he ;'an%i%3 &l-

a2ain %hi& ill *e

-e%er!ine- *3

e80ec%e- #reca&%

&ale& ini%iall3

TR The ler %he 0rice. %he le&&

&%ee0 %he %%al

re"en'e c'r"e

TR

The Brea1e"en 0in%

cc'r& here %%alre"en'e e;'al& %%al

c&%& %he #ir!. in

%hi& e8a!0le 'l-

ha"e % &ell %

2enera%e &'##icien%

re"en'e % c"er i%&

c&%&



Break-Even AnalysisC&%&/Re"en'e

O'%0'%/Sale&

FC

VCTCTR (0 = 6)

I# %he #ir! ch&e% &e% 0rice hi2her

%han 6 (&a3 <)

%he TR c'r"e

'l- *e &%ee0er

%he3 'l- n%

ha"e % &ell a&

!an3 'ni%& %

*rea1 e"en

TR (0 = <)

6



Break-Even Analysis

C&%&/Re"en'e

O'%0'%/Sale&

FC

VCTCTR (0 = 6)

I# %he #ir! ch&e% &e% 0rice& ler

(&a3 ) i% 'l-

nee- % &ell !re

'ni%& *e#re

c"erin2 i%& c&%&

TR (0 = )

<



Break-Even Analysis

C&%&/Re"en'e

O'%0'%/Sale&

FC

VCTC

TR (0 = 6)

5&&

Pr#i%



Break-Even Analysis

C&%&/Re"en'e

O'%0'%/Sale&

FC

VCTC

TR (0 = 6)

6

A&&'!e

c'rren% &ale&

a% 6

ar2in # Sa#e%3

Margin of

safety &h&

h #ar &ale& can#all *e#re l&&e&

!a-e I# =

,,, an- 6 =

>,,. &ale& c'l-

#all *3 >,, 'ni%&

*e#re a l&&'l- *e !a-e

TR (0 = <)

<

A hi2her 0rice

'l- ler%he *rea1

e"en 0in%

an- %he

!ar2in #

&a#e%3 'l-i-en



C&%&/Re"en'e

O'%0'%/Sale&

FC

VC

TR

9i2h ini%ial FCIn%ere&% n -e*%

ri&e& each 3ear

FC ri&e %here#re

FC

5&&e& 2e%

*i22er



Break-Even Analysis

• )e'e'ber<

• A $ig$er prie or lo,er prie does not'ean t$at break even ,ill never be

rea$edK• +$e BE point depends on t$e nu'ber

o& sales needed to generate revenue

to over osts t$e BE $art is 83+ti'e relatedK



Exerise ><

• Co'pany ABC sell ,idgets &or / aunit.

• +$eir Lxed ost is>//5///

• +$eir variable ost is >/ per unit.

• #$at is t$e break-even point using t$ebasi algebrai approa$%



Exerise ><Ans,er

)evenues "ariable ost - Fixed ost = 30

(7SP x * (7"C x * FC = 30 / - >/ >//5// = /.//

/ = >//5///

= 5///



Exerise <• Co'pany 2EF $as a $oie o& t,o

'a$ines to pur$ase. +$ey bot$ 'aket$e sa'e produt ,$i$ sells &or >/.

• 9a$ine A $as FC o& 5/// and a per unitost o& .

• 9a$ine B $as FC o& >5/// and a perunit ost o& >.

• 7nder ,$at onditions ,ould you selet9a$ine A%



Exerise <Ans,er

Step >< Break-even analysis on bot$ options.

9a$ine A<

v = 5///

>/ - = >/// units

9a$ine B<

v = >5///

>/ - >

= >44 units



Exerise <Ans,er Cont.

9a$ine A = 9a$ine B

FC M "C = FC M "C

5/// M = >5/// M >

? = >/5///

= //

• 9a$ine A s$ould be pur$ased i&expeted de'and is bet,een >/// and// units per year.



Su''ary<• Break-even analysis an be an eGetive

tool in deter'ining t$e ost eGetivenesso& a produt.

• )euired uantities to avoid loss.

• 7se as a o'parison tool &or 'aking adeision.

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BE and timevalue of money.pptx