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Break Even Analysis
Break Even Analysis
Profit analysis
Profit in Business
According to Schumpeter, Profit reward for
innovation
Profit Reward for undertaking risk
Profit motive play a role in the efficient
allocation of resources In a bid to maximize
profit, all firms try to use its resources
efficiently when faced with tough competition
from the rival firms.
Break-even Analysis
Examines relation between Total Revenue, Total Cost
Break-even Chart
Graphically representing the relation between
TR,TC,TFC
it
Prof
TC
A
B
TFC
s
Los
Qo
TR,TC,TFC
it
Prof
s
Los
TR
A
B
s
Los
Qo
TFC
Qo1
TR,TC,TFC
it
Prof
TC
TC1
TFC
TFC1
O
Qo1
Qo
operation
Loss less than one crore
Expected to achieve break-even after several
years of operations due to high capital
expenditure in retail industry
Reliance quite impressive as compared with
other established companies, which enjoy
very low profit margin of 1% or 2%
* Source: Mint dated 19th May, 2008
Example
A coastal ship can carry a maximum of
Solution 1
1.
TFC
QB
10,000
P AVC
TFC
TFC
SB
Rs.85,00,000
1 ( AVC / P ) 1 (TVC / TR )
2.
even
QB
10,000
%B
100
100 10%
Qmax
1,00,000
Solution 2
1. Output to be targeted
P AVC
550 100
20,000
% Capacity to be utilized
QD
20,000
%D
100
100 20%
Qmax
1,00,000
Margin of Safety
If a firm operates at a higher output level much
Q A QB
100
QA
Solution 2. If targeted output is actually
increased
The gap between actual sales & break-even
sales have increased substantially indicating
high safety margin
Recommendations
Further cut in cost of production Adoption of