NAME – SOUVIK MONDAL

UNIV. ROLL – 13030822065

SEM – 3rd (2nd Year)
STREAM – CSE(AIML)
SUBJECT – ECONOMICS FOR ENGINEERS (HUMANITIES-II)
SUBJECT CODE : HSMC-301

ca-2
Session 2023-24
 break- even analysis
A break-even analysis is an economic tool that is used to determine
the cost structure of a company or the number of units that need to be
sold to cover the cost. Break-even is a circumstance where a company
neither makes a profit nor loss but recovers all the money spent.
The break-even analysis is used to examine the relation between the
fixed cost, variable cost, and revenue. Usually, an organisation with a
low fixed cost will have a low break-even point of sale.

 Components of Break-Even Analysis

 Fixed costs: These costs are also known as overhead costs.
These costs materialise once the financial activity of a business
starts. The fixed prices include taxes, salaries, rents,
depreciation cost, labour cost, interests, energy cost, etc.
 Variable costs: These costs fluctuate and will decrease or
increase according to the volume of the production. These costs
include packaging cost, cost of raw material, fuel, and other
materials related to production.

 Break-Even Analysis Chart

 Break-Even Analysis Formula

TC = Total cost
FC = Fixed cost
TC = FC + Variable cost
B = The intersection of TC and sales (no loss or no gain situation)
A = Break-Even sales
C = Break-Even quantity/Break-Even point (BEP)
 The formula for the break-even point (BEP) is

 Importance of Break-Even Analysis

 Manages the size of units to be sold: With the help of break-
even analysis, the company or the owner comes to know how
many units need to be sold to cover the cost. The variable cost
and the selling price of an individual product and the total cost
are required to evaluate the break-even analysis.
 Budgeting and setting targets: Since the company or the
owner knows at which point a company can break-even, it is
easy for them to fix a goal and set a budget for the firm
accordingly. This analysis can also be practised in establishing a
realistic target for a company.
 Manage the margin of safety: In a financial breakdown, the
sales of a company tend to decrease. The break-even analysis
helps the company to decide the least number of sales required
to make profits. With the margin of safety reports, the
management can execute a high business decision.
 Monitors and controls cost: Companies’ profit margin can be
affected by the fixed and variable cost. Therefore, with break-
even analysis, the management can detect if any effects are
changing the cost.
 Helps to design pricing strategy: The break-even point can be
affected if there is any change in the pricing of a product. For
example, if the selling price is raised, then the quantity of the
product to be sold to break-even will be reduced. Similarly, if
the selling price is reduced, then a company needs to sell extra
to break-even.

 Interpretation of Break-Even Analysis:

 As illustrated in the graph above, the point at which total fixed
and variable costs are equal to total revenues is known as the
break-even point. At the break-even point, a business does not
make a profit or loss. Therefore, the break-even point is often
referred to as the “no-profit” or “no-loss point.” The break-even
analysis is important to business owners and managers in
determining how many units (or revenues) are needed to cover
fixed and variable expenses of the business. Therefore, the
concept of break-even point is as follows:

• Profit when Revenue > Total Variable Cost + Total Fixed

Cost

• Break-even point when Revenue = Total Variable Cost + Total

Fixed Cost

• Loss when Revenue < Total Variable Cost + Total Fixed Cos

 Break-Even Analysis Example

Colin is the managerial accountant in charge of Company A, which
sells water bottles. He previously determined that the fixed costs of
Company A consist of property taxes, a lease, and executive salaries,
which add up to Rs. 100,000. The variable cost associated with
producing one water bottle is Rs. 2 per unit. The water bottle is sold at
a premium price of Rs. 12. To determine the break-even point of
Company A’s premium water bottle:

Break Even Quantity = 100,000 / (12 – 2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of
the water bottles, Company A would need to sell 10,000 units of
water bottles to break even.

 Conclusion
Break-even analysis is an essential financial tool for businesses to
understand their cost structure, pricing strategies, and overall
profitability. By calculating the break even point and creating a
graphical representation, companies can make informed decisions that
contribute to their financial success. It is important to note that break-
even analysis is a dynamic tool and should be revisited regularly to
adapt to changes in costs, pricing, and market condition.