The Break Even profit Video Lecture | Economics CUET Preparation - Commerce

this learning object is a production of
Abu Dhabi men's college center of
excellence for ICT and learning
technology break-even analysis is a
powerful management tool it is used in
planning decision-making and controlling
expenses it can also be useful in
determining whether to buy or lease
expanding change new area build a new
client and many other business
applications it can also show the impact
on your business of changing your price
structure in this tutorial we will
examine the effect of changes in the
selling price variable costs and the
fixed cost on profit using a break-even
chart with volume increasing on the
x-axis you can see that the fixed cost
won't change depending on the volume
after all it is fixed some examples of
fixed costs are list costs rent and
insurance the fixed costs are shown at
the point where the total cost line
crosses the y-axis on the other hand
variable costs such as labor materials
and supplies are costs that change with
the volume of production the total
variable cost is the variable cost per
unit in other words how much we are
spending in labor and material cost for
each unit that we are producing
multiplied by how many units we sell and
that's our total variable cost if we
plug in the variable costs on top of the
fixed cost we get the total cost line
our total cost is therefore the sum of
the fixed costs plus the total variable
cost we have a line that has a positive
slope and it starts out at what the
fixed costs are and goes up from there
now we look at the total revenue line on
the chart the total revenue is a
function of the units sold it is a
function of our selling price
per unit times the number of units sold
you can see that when we saw no units we
don't have any revenue so we're at zero
but we go up with a line that has a
slope equal to the selling price of the
product vary given volume is what I want
to talk about now the break-even volume
is a specific number and it refers to
the number of units that you need to
sell so that the total revenue equals
total cost where the total revenue and
total cost lines intersect is the
break-even point and the volume there is
called the break-even volume and this is
a very important concept most companies
will know what their breakeven volume is
because they know until they hit that
point they don't have a profit if your
actual volume is greater than the
break-even volume then you have a profit
now we're looking to the left of the
break-even point area shaded in red here
we didn't generate enough revenue to
take care of our costs if your actual
volume is less than the break-even
volume then it means that you're not
selling enough to cover your expenses so
you have a loss let's take a closer look
at what break-even analysis telling us
suppose the management develops a new
process layout or selection of new
equipment that reduces fixed costs for
the company profit is increased by the
amount of savings on the fixed costs on
the break-even chart a reduced fixed
cost lowers the total cost line which
results in increased profits to the
company but in addition to that you will
notice that break-even point is lowered
when the management is able to reduce
this fixed cost for the company they
have a very direct impact on the
profitability of the company and on how
soon they begin making profit by
lowering the break event next we will
decrease the variable costs per unit
suppose the management is able to reduce
material and labor costs for each unit
produce the savings I realized now for
each unit sold for example if you're
able to figure out how to make parts
with less time or less material you are
in this category the slope of the
variable cost line decreases if we
decrease the variable cost and so the
break-even point is reduced and our
fixed costs are recovered sooner and
profits are increased what if we are
able to increase the selling price per
unit raising the selling price without
lowering volume increases profit here
our total cost line is the same but our
total revenue line is higher because the
selling price per unit is higher so at
the same selling volume X we are making
more profit again in this case the
break-even volume is reduced breakeven
analysis is a powerful tool it helps you
determine what sells volume you need to
reach before you start making a profit
at the break-even point there is no
profit there is no loss if we sell more
than the break-even point you make a
profit if you sell less you lose money
break-even analysis explores the
relationship between cost and revenue in
relation to sales volume as a result you
are able to set optimal pricing and
determine optimal production