In business profits should not be left to chance. They should be planned. The break-even analysis is a useful technique in this connection. The break-even point (BEP) and break-even charts are the by-products of this analysis which are excellent tools of managerial control over business profits. The break-even analysis is principally concerned with the cost-volume-profit analysis. It magnifies a set of inter-relationships of fixed costs, the level of activity and sales mix to the probability of the concern.
Essentially, it is a tool of financial analysis whereby the impact on profit position of the change in volume, prices, costs and mix can be estimated with reasonable definiteness and accuracy. This analysis, as a matter of fact, is an improvement over the ratio technique of financial analysis. Ratio analysis is concerned with the forecasting of data and as such provides invaluable information on many types of managerial decisions.
Meaning of Break-even Analysis
In the words of Matz and Curry : “Break-even analysis indicates at what level costs and revenues are even equilibrium.” Thus, break-even analysis is associated with calculation of break-even point. This B.E.P. may be described as a specific level of activity or volume of sales which breaks the revenues and costs evenly. It is also known as ‘no-profit, no-loss-point’. It can be computed mathematically also and charted on a graph paper.
If the BEP is shown on the graph paper it will assume the name of break-even chart. The break-even point can be expressed in terms of units produced, in per cent of plant capacity or in amount of sales. This can be calculated in two ways:
A. Equation of Technique
(i) BEP in units PQ = F. + NQ
- P stands for selling price per unit,
- Q stands for quantity of goods sold,
- F for fixed costs,
- V for Variable costs per unit,
- Q for Quantity of goods produced and sold.
(ii) BEP in value :
S = F x V
- S stands for sales. :
- F for fixed costs. :
- V for variables costs.
B. Contribution Technique
(i) B.E.P. in units = Fixed Costs/Contribution per unit
(ii) B.E.P. in value = Fixed Costs/ P/V ratio Here : P/V Ratio = Contribution/Sales x 100