Formula Sheet: Break Even Analysis | Industrial Engineering - Mechanical Engineering PDF Download

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Break Even Analysis
Introduction to Break Even Analysis
• Definition : Break-even analysis determines the point at which total rev-
enue equals tota l costs, resulting in zero profit or loss.
• K ey Compone nts :
– Fixed Costs (FC) : Costs independent of production volume (e .g., rent,
salaries).
– V ariable Costs (V C) : Costs dependent on production volume (e.g., r aw
materials, labor).
– T otal Cost (T C) : Sum of fixed and variable costs.
– Revenue (R) : Income from selling goods or services.
K ey F ormulas
• T otal Cost :
T C = FC+ V C
where V C = V ariable cost per unit×Q , andQ = q uantity produced/sold.
• Revenue :
R =P×Q
whereP = selling price per unit,Q = q uantity sold.
• Profit :
Profit =R- T C = (P×Q)-( FC+ V C)
• Contribution Margin per Unit :
CM =P- V C per unit
• Contribution Margin Ratio :
CM Ratio =
CM
P
=
P- V C per unit
P
Break Even Point (BEP)
• Break Ev en Point in Units :
Q
BEP
=
FC
P- V C per unit
=
FC
CM
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Break Even Analysis
Introduction to Break Even Analysis
• Definition : Break-even analysis determines the point at which total rev-
enue equals tota l costs, resulting in zero profit or loss.
• K ey Compone nts :
– Fixed Costs (FC) : Costs independent of production volume (e .g., rent,
salaries).
– V ariable Costs (V C) : Costs dependent on production volume (e.g., r aw
materials, labor).
– T otal Cost (T C) : Sum of fixed and variable costs.
– Revenue (R) : Income from selling goods or services.
K ey F ormulas
• T otal Cost :
T C = FC+ V C
where V C = V ariable cost per unit×Q , andQ = q uantity produced/sold.
• Revenue :
R =P×Q
whereP = selling price per unit,Q = q uantity sold.
• Profit :
Profit =R- T C = (P×Q)-( FC+ V C)
• Contribution Margin per Unit :
CM =P- V C per unit
• Contribution Margin Ratio :
CM Ratio =
CM
P
=
P- V C per unit
P
Break Even Point (BEP)
• Break Ev en Point in Units :
Q
BEP
=
FC
P- V C per unit
=
FC
CM
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• Break Ev en Point in Sales V alue :
S
BEP
=
FC
CM Ratio
• Condition a t BEP :
R = T C or P×Q
BEP
= FC+( V C per unit×Q
BEP
)
Margin of Safety
• Margin of Safety in Units :
MOS =Q
actual
-Q
BEP
whereQ
actual
= actual or projected sales volume.
• Margin of Safety in Sales V alue :
MOS V alue =R
actual
-S
BEP
whereR
actual
=P×Q
actual
.
• Margin of Safety Ratio :
MOS R atio =
MOS V alue
R
actual
×100
A dditional Concepts
• T arget P rofit Analysis :
Q
target
=
FC+ T arget Profit
CM
• Break Ev en Time : Time to reach BEP based on sales r ate.
t
BEP
=
Q
BEP
Sales r ate per unit time
• Cost-V olume-Profit (CVP) Analysis : Used to determine how changes in
costs, volu me, and price affect profit.
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