Break Even Analysis
Presented by
Francis Pinto
Shilpa Kulkarni 31
Pradnya Morje 36
Amol Rane
Tushar Wadivkar 57
Aditya Divadkar 58
17
43
Costs are of two types
Total cost = Variable cost + Fixed cost
Variable cost
Fixed cost
Direct
Varies with activity level
Recovered first
Common / indirect
Same at all activity level
Contribution after recovery of
Variable Cost
Selling price recovers variable cost fully and
fixed cost partly.
What is Break Even Analysis ?
Actual profit starts only after the fixed
cost is recovered fully from the
contribution.
Once the fixed cost is recovered fully, the
contribution then contributes towards the
profit.
The situation where the fixed cost is
recovered fully is region of no profit no
loss. It is known as Break even point. The
actual profit starts only after the Break
even is reached.
Break Even Chart
Y
FC
BEP = ----------SP - VC
200 175 150 -
Selling price
125 Total cost
BEP
100 75 -
Fixed Cost
Cost
/ Sales
in Rs
50 -
25 (0,0)
|
100
|
200
Activity level
|
300
|
400
|
500
|
600
|
700
X
How does Break Even Analysis Helps Manager ?

To decide sales volume needed to attain target
profit

Change in selling price decision

Decision to expand the capacity

Product drop decision

To study effect of alternative prices
Alternate prices
Y
SP 1
200 SP 2
175 150 -
SP 3
125 100 Total cost
75 50 -
BP 1
BP 2
BP 3
25 Fixed Cost
Cost
/ Sales
in Rs
(0,0)
|
100
|
200
Activity level
|
300
|
400
|
500
X
Drawbacks of Break Even Analysis
Product cycle
 Technology absolance
 Cots , revenue relationship is not linear

Factors that affect Break Even





Change in government policy
Change market scenario
Change in customer perception
Political influences etc.
Change in economy
Need for new model
The break even analysis done in this
way is known as Accountant’s break
even analysis as no economic and other
factors are taken into consideration.
Organisations generally work only on
the basis of Accountant’s break even
analysis and suffer in long run.
Economist’s model of Break-Even Analysis
The Economist’s model of break-even
analysis assumes that costs and
revenues are curvilinear. The revenue
curve is expected to indicate that the
firm is able to sell increasing quantities
only by reducing the prices.
Economist’s model of Break-Even
Analysis
Total Cost
Y
LOSS
B2
200 -
Selling price
175 150 125 PROFIT
100 B1
75 -
50 LOSS
Fixed Cost
25 Cost
/ Sales
in Rs
(0,0)
Optimum Level
|
100
|
200
Activity level
|
300
|
400
|
500
X
How it differs from accountant’s model



Economist’s treat costs and revenue as
curvilinear whereas accountants treat them as
linear
Economist’s break even chart indicates two break
even points whereas accountant’s break even
chart shows only once, which indicates that after
reaching the break even the further sell will
always generate profit, which is not true.
From the profit range shown in the economist’s
break-even chart, an optimum level of operation
can be found This is not possible from an
accountant’s break even chart.
Case study
Case # 1
Case # 2
Case # 3
Case # 4
Fabric online
Tata Indica
Intel
Reliance Infocom
Case study
Case # 1
Fabric online
Interior view
Interior view is a traditional chain of retail store,
run by Judy Williams, at Western US.
The shop is featuring home décor, fabrics,
accessories and antique.
The company developed a website
www.fabric.online.com, with a view extending the
reach of the store to those outside the local
market and add to the store to the retail base.
The sale for the year 2002 was :
Particulars
FY 2002
Online Sale due to website
$20,050
Direct cost of Sale
$10,145
Gross Margin
$9,905
Initially Judi was very happy that her sale was
increased by $ 20,050 due to the online trading,
which inturn increased the Gross margin by $
9,905.
Actual cost / revenue of website sale
Particulars
FY 2002
Gross Margin
$9,905
Variable Cost ( 150 units )
Delivery Cost
$1,500
Packaging & misc.
$1,200
Total Variable cost
$2,700
Contribution towards fixed cost
$7,205
Fixed Cost
Website Expenses
Website Development
$2,850
Website Infrastructure
$2,134
Advertising / Promotion
$1,200
Equipment Expenses
$600
Website maintenance
$300
Other
$500
Total Fixed cost ( break even sale )
$7,584
Profit / Loss
($379)
So the company’s aim was to increase their sale
volume
Demographic, psycholographic and behavioural
characteristics were observed by the company, it
was observed that :



Professional Youngsters are expected to be the
most likely of the targeted segment.
The online fabric shoppers most often find the
site through search engines.
The internet learners represents all of the
targeted segments
The online sale was increased from 150 units to
almost 250 units .
The net result shown in 2003, as compared
to 2002 was as under :
Particulars
FY 2002
FY 2003
Online Sale due to
website
$20,050
$30,350
Direct cost of Sale
$10,145
$15,150
Gross Margin
$9,905
$15,200
Considering the fixed and variable cost of the online
trading, the actual working is :
Particulars
FY 2002
Gross Margin
Variable Cost
FY 2003
$9,905
( 150 units )
$15,200
( 250 units )
Delivery Cost
$1,500
$2,500
Packaging & misc.
$1,200
$1,500
Total Variable cost
$2,700
$4,000
Contribution towards fixed cost
$7,205
$11,200
Fixed Cost
Website Expenses
Website Development
$2,850
$3,350
Website Infrastructure
$2,134
$600
Advertising / Promotion
$1,200
$2,500
Equipment Expenses
$600
Website maintenance
$300
$300
Other
$500
$500
Total Fixed cost ( break even sale )
$7,584
$7,250
Profit / Loss
($379)
$3,950
Case study
Case # 2
TATA Indica
Introduction





Available in standard and luxury versions
Dec.1998 Tata Indica Launched
Designed with assistance from IDEA and LE
MOTEUR
Telco has produced this engineering marvel
in a record time of 31 months
1700 crore factory Built in a 168 acre plot
Market Position

Tata is positioned the Indica head on with
Maruti 800

At the Time of Launch Telco’s main steam
business i.e. commercial vehicle segment
passing through a cruelest period
Breakeven Analysis





Break Even estimated in December 1998 was
60,000 cars.
In May 2000 break even quantity revised to
90,000 as Telco’s operating profit margin fell
2.4% to 6%.
Cost saving measures adopted
Efforts to improve Working capital.
Borrowings Scale down by 441 crore to 3,004
crore
Break Even Point




Launched in 1998 Break even achieved in the
Ist quarter of 2001-2002
Break even point down from 60000 cars to
53000 cars.
Launched of V2 diesel and petrol version in
2001
Factors responsible for B.E.P
Case study
Case # 3
Intel Corporation
Intel Corporation
Intel Corporation, founded in 1968 is a
leading company at US has around 450
products and services in computer software &
hardware . Which includes wide range from
desktop components, notebook components,
server and workstation components, flash
memory, networking & communications
design components & network connectivity,
wireless components & software services
etc.
structure
1992-93
( in US $ )
Annual sale
Annual fixed cost
Annual Inspection fixed cost
( in US $ )
17,000
5,160,000
40,000
Total Fixed cost
Variable cost / unit
Variable inspection cost / unit
5,200,000
200
15
Total variable
215
Selling price / unit
665
Contribution / unit
440
BEP in units ( FC / contr. )
11,818
BEP in Rs.
7858970
Total contribution
7480000
Operating Profit
Total sale
Profit Volume ratio
2280000
11560000
20%
For the year 1993-94 and the estimated cost / revenue statement was as under
1993-94
( in US $ )
Annual sale
Annual fixed cost
Annual Inspection fixed cost
25,000
5,180,000
40,000
Total Fixed cost
Variable cost / unit
Variable inspection cost / unit
( in US $ )
5,220,000
210
20
Total variable
230
Selling price / unit
680
Contribution / unit
450
BEP in units ( FC / contr. )
BEP in Rs.
Total contribution
11,600
7888000
11250000
Operating Profit
Total sale
Profit Volume ratio
6,030,000
17000000
34%
The working of inspection cost was as
under
with initial alternate
with new alternate
in US $
Fixed cost of inspection
Variable cost of inspection /
unit
No. of units
40,000 Fixed cost of
inspection
20 Variable cost of
inspection / unit
25,000 No. of units
Total variable cost
500,000 Total variable cost
Total inspection cost
540,000 Total inspection cost
Difference $ 330,000
in US $
160,000
2
25,000
50,000
210,000
The comparative working of estimated and actual was as
under :
1993-94 [ estimated ]
Rs. ( in US $
)
Annual sale
Annual fixed cost
Annual Inspection fixed cost
Variable inspection cost / unit
Rs. ( in US $ )
Rs. ( in US $
)
25,000
25,000
5,180,000
5,180,000
40,000
160,000
Total Fixed cost
Variable cost / unit
1993-94 [ actual ]
5,220,000
Rs. ( in US $
)
5,340,000
210
210
20
2
Total variable
230
212
Selling price / unit
680
680
Contribution / unit
450
468
11,600
11,496
BEP in units ( FC / contr. )
BEP in Rs.
Total contribution
7888000
7817280
11250000
11700000
Operating Profit
Total sale
Profit Volume ratio
6,030,000
17000000
6,360,000
17000000
34%
37%
Benefits :

Break even was reached early

PV ratio was increased to 37%

Lower inspection cost which indicates
quality improvement
Case study
Case # 4
Reliance Infocomm
The Reliance Empire
Reliance Industries is the largest petrochemical
and petroleum producer in India and is poised for major
growth.
Amazing Facts about Reliance Infocomm

A 15,000 cr. project that kicked off on 28th Dec.

Most popular technology used : CDMA

Plans to offer full bouquet of voice, data, image,
value-added services and high quality end-toend connectivity on nationwide basis.

Provides premium to the Reliance Ind. Ltd. Stock
More Amazing Facts about Reliance
Infocomm

Reliance Infocomm plans to achieve its break-even in
the first year of launch itself.

Plans to target 12 million customers in its first year
of operations.

6,750 Cr. invested by RIL for a 45 per cent stake in the
company.

Present shortfall is approximately 40 per cent of the
target market that Reliance Infocomm expects to
conquer.
Telecom Landline Demand and Supply
(Nov. 02)
Circles
Tel. Lines
Demand
Shortfall
22.0
22.6
2.7
Delhi
2.2
2.3
6.1
Gujarat
3.0
3.0
1.5
Karnataka
2.8
2.9
3.6
Maharashtra
4.0
4.1
4.2
Mumbai
2.7
2.7
2.0
Tamil Nadu
2.9
2.9
0.3
Chennai
1.1
1.1
0.0
Category B
15.3
16.4
7.7
Category C
3.5
3.7
6.5
40.8
42.8
4.9
Category A
Total
Risks for Reliance Infocomm

The company has just launched the project and its
results would speak in a few months time.

Wooing customers who already avail the services of
giants MTNL, BPL and Orange will be a tough task.

Time for Anil and Mukesh Ambani to prove
themselves after the demise of their father and win
the trust of the present and future shareholders.
Limitations to Break Even Analysis




Limitation of data , viz. neglect of imputed
costs , arbitrary depreciation estimates , and
inappropriate allocation of overhead costs .
Relationship between costs and revenues
and input bound to change over time.
Costs in a particular period need not be
entirely due to the output.
Changes in selling costs are a cause and not
result of changes in output .
Limitations to Break Even Analysis
Contd…




Realistic calculations need to be made at
several price levels to get various total
revenue curves.
Break even Analysis is an effective tool for
short run use only
Inclusion of too many heads in BE analysis
causes both good and bad performance can
be buried in the total picture of the group
Factors like technological change ,
improved management, changes in the
scale of the fixed factors of production etc.
are ignored.
Overview
Case Study
Stage in
Product
Life Cycle
Expected
Maximum
Breakeven
period
Result at
the end of
expected
breakeven
period
Strategies adopted to
improve Results
Results
www.fabric
.online.com
Expansion
1 year
(2002-03)
Loss $379
Concentrated on
advertisement and
promotions
Online sales
increased from
150 to 250.
Profit $3950
Tata Indica
Launch
2 yrs 3 months
60,000 cars)
(Dec1999march 2001)
Cash Break
even not
achieved
Worked towards
improvement of
company working
capital, Scaled down
borrowing by 441 crores
Break Even
achieved at
53000 cars .
Operating profit
8.32%
Intel (mother board)
Existing
Product
Annual
(1992-93)
20% profit
New machine installed
with additional
inspection accessories
Reliance Infocom
New
Product
1 year
To be
observed
Target:
12 million subscribers.
Low prices
ISP High connectivity.
Operating
Profit was 37%
much more
than the
estimated 34%
To be observed
Conclusion
A thorough knowledge of the relationship of
costs, price and volume is extremely essential for
business executives.
They need plan for profits despite of uncertainties
created by dynamic nature of consumer needs, the
diverse nature of competition , the uncontrollable
nature of most elements of cost , and the diverse
nature of continuous technological developments.
Break even Analysis should be used as an
effective tool to guide in decision making and not as
a substitute for judgment , logical thinking and
common sense.