UNIT1 INTRODUCTION OF PPC Break Even Analysis 1

UNIT-1 INTRODUCTION OF PPC • Break –Even Analysis 1 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

What is Break-Even Analysis? q Break-even analysis brings out the interrelationship between the Revenue, Cost, Volume q Enterprises is to produce products utilizing minimum cost and sell the same at a price to get maximum revenue. q It is a well known fact that in a competitive market, price is decided in the market. Therefore leads to a situation where maximum of revenue is possible only cutting down cost of production. q Cost of production have two elements 2 i. Variable cost ii. Fixed cost N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Variable Cost q A variable cost is a cost that varies in relation to changes in the volume of activity. The variable cost concept can be used to model the future financial performance of a business, as well as to set minimum price points. The most common variable costs are: § Direct materials, since the cost of materials are charged to expense when the associated products are sold. § Commissions, since the sales staff earns commissions when sales transactions are completed. § Billable labor, since wages associated with billable hours are charged to expense when the associated sales transactions are completed. § Piece rate labor, where employees are paid based on the number of units produced. 3 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Fixed Cost q Fixed costs remain roughly the same regardless of sales/output levels. Examples include: Rent, Insurance and Wages. TOTAL COSTS Total Costs is simply Fixed Costs and Variable Costs added together. TC = FC + VC 4 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Break – Even Point q Break- even point may be defined as the level of sales at which total revenues and total costs are equal. q It is also Known as No-Profit No-Loss Point. Determination of Break –Even point Two approaches used to determine 5 i. The algebraic method ii. The graphical method. N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

The Algebraic Method FC= Fixed Cost VC= Variable Cost TVC= Total Variable Cost TC= Total Costs TR= Total Revenue or Total income Q=Sales volume or quantity sold SP= Selling Price per unit 6 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Break- Even point in terms of Physical Units Total Cost= Fixed Cost+ Variable Cost TC= FC + (VC x Q) Total Revenue=selling price/unit x Quantity sold TR= SP x Q Break –Even Point(BEP) Total cost= Total revenue TC=TR FC + (VC x Q)= SP x Q Q BEP = FC SP-VC 7 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Break-Even point in terms of sales volume Break –Even sales (BEP in Rupees) Fixed cost 1 - Variable cost/unit Selling price /unit Contribution q The difference between selling price and variable cost per unit is known as contribution or contribution margin. Contribution = Selling price- Variable cost C= SP-VC 8 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021

Contribution Ratio = Selling price- variable cost Selling Price P/V Ratio = Contribution Sales Margin of Safety is the difference between the existing level of output and the level of output at BEP Margin of Safety in(%)= Sales- Sales at BEP Sales 9 N. DINESHKUMAR AP/MECH/SRIT/PPC/ UNIT 1. 5 2/21/2021