UNIT -IV

BREAKEVEN ANALYSIS

INTRODUCTION
A breakeven analysis is used to
determine how much sales volume your
business needs to start making a profit.
The breakeven analysis is especially
useful when you're developing a pricing
strategy, either as part of a marketing plan
or a business plan.

BREAK EVEN CALCULATER

Fixed Cost:
The sum of all costs required to produce
the first unit of a product. This amount
does not vary as production increases or
decreases, until new capital expenditures
are needed.

 Variable Unit Cost:

Costs that vary directly with the production
of one additional unit.

Expected Unit Sales:

Number of units of the product projected to
be sold over a specific period of time.

Unit Price:
The amount of money charged to the
customer for each unit of a product or
service.

 Total Variable Cost:

The product of expected unit sales
and variable unit cost.
(Expected Unit Sales * Variable
Unit Cost )
Total Cost:
The sum of the fixed cost and total
variable cost for any given level of
production.
(Fixed Cost + Total Variable Cost )

 Total Revenue:
The product of expected unit sales
and unit price.
(Expected Unit Sales * Unit Price )
Profit (or Loss):
The monetary gain (or loss) resulting
from revenues after subtracting all
associated costs. (Total Revenue Total Costs)

 BREAK EVEN POINT:

Number of units that must be sold in
order to produce a profit of zero (but
will recover all associated costs).
Break Even Point (IN UNIT)= Fixed
Cost /S. Price- Variable Unit Cost
Break Even Point (in Rs)=Fixed
Cost/ S. Price-Variable unit
Cost*Units

 For example, suppose that your fixed costs

for producing 100,000 product were 30,000
rs a year.
Your variable costs are 2.20 rs materials,
4.00 rs labour, and 0.80 rs overhead, for a
total of 7.00 rs per unit.
If you choose a selling price of 12.00 rs for
each product, then:
30,000 divided by (12.00 - 7.00) equals
6000 units.
This is the number of products that have to
be sold at a selling price of 12.00 rs before
your business will start to make a profit.

Break-Even Analysis
TR (p = 2)

Costs/Revenue

TC

Profit

Loss

VC

FC

Q1

Output/Sales

USES OF BREAK EVEN POINT

Helpful in deciding the minimum quantity of
sales
Helpful in the determination of tender price
Helpful in examining effects upon
organizations profitability
Helpful in deciding about the substitution of
new plants
Helpful in sales price and quantity
Helpful in determining marginal cost

LIMITATIONS
Break-even analysis is only a supply side (costs only)
analysis, as it tells you nothing about what sales are
actually likely to be for the product at these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are constant per unit of
output, at least in the range of likely quantities of sales.
It assumes that the quantity of goods produced is equal to
the quantity of goods sold (i.e., there is no change in the
quantity of goods held in inventory at the beginning of the
period and the quantity of goods held in inventory at the
end of the period.
In multi-product companies, it assumes that the relative
proportions of each product sold and produced are
constant.

Social Cost Benefit Analysis

What is Social Cost Benefit Analysis ?

So, to reflect the real value of a project to society, we
must consider the impact of the project on society.
Impact
Positive
(Social Benefit)

Negative
(Social Cost)

Thus ,when we evaluate a project from the view point of

the society (or economy) as a whole, it is called Social Cost
Benefit Analysis (SCBA)/Economic Analysis.

 Social cost-benefit analysis is a systematic

and cohesive economic tool(method) to
survey all the impacts caused by an urban
development project.
It comprises not just the financial effects
(investment costs, direct benefits like tax
and fees, et cetera), but all the social
effects, like: pollution, safety, indirect
(labour) market, legal aspects, etc.

Core differences between CBA & SCBA

CBA
Limited range of effects
are considered as it
measures the profitability of
individuals who are only a
part of the society.

SCBA
The evaluator has to take a
wider view as it tries to
measure social values of the
whole society.

It is quantitative in nature.

It can be quantitative or
qualitative.

Scope of SCBA
SCBA can be applied to both Public & private
investments
Public Investment:
SCBA is important specially for the developing
countries where govt. plays a significant role in the
economic development.
Private Investment:
Here, SCBA is also important as the private
investments are to be approved by various
governmental & quasi-governmental agencies.

Objectives of SCBA
The main focus of Social Cost Benefit Analysis is to
determine:
1. Economic benefits of the project in terms of shadow
prices;
2 The impact of the project on the level of savings and
investments in the society;
3. The impact of the project on the distribution of income
in the society;
4. The contribution of the project towards the fulfillment
of certain merit wants (self- sufficiency, employment
etc).

Significances of SCBA
CBA is unable to reflect social values. Hence SCBA has
been emerged with some interesting significances. These
significances also make the SCBA different from the
CBA.

Market Imperfections
Externalities
Taxes & Subsidies
Concern for Savings
Concern for Redistribution
Merit Wants

Significances of SCBA (Contd.)

Market Imperfections:
Market prices, the basis for CBA, do not reflect the
social values under imperfect market competition.
Externalities:
A project may have beneficial or harmful external
effects that are considered in SCBA, not in CBA.
Taxes & Subsidies:
From the social point of view, taxes & subsidies are
nothing but transfer payments. But in CBA, taxes
& subsidies are treated as monetary costs and
benefits respectively.

Significances of SCBA (Contd.)

Concern for Savings:
In SCBA, the division between benefits & consumption is relevant
wherein higher valuation is placed on savings.But in CBA such division
is irrelevant.
Concern for Redistribution:
In SCBA, the distribution of benefits is very much concerning issue
where commercial private firm does not bother about it.
Merit Wants:
Merit wants are important from the social point of view and therefore,
SCBA considers these wants.

Approaches to SCBA

There are two principal approaches for Social Cost Benefit

Analysis.
A. UNIDO Approach, and
B. L-M Approach.
A. UNIDO Approach:
This approach is mainly based on the publication of UNIDO
(United Nation Industrial Development Organization)named
Guide to Practical Project Appraisal in 1978.
B. L-M Approach:
I.M.D Little & J.A.Mirlees have developed this approach for
analysis of Social Cost-Benefit in Manual of Industrial Project
Analysis in Developing Countries and Project Appraisal &
Planning for Developing Countries.