Break Even Point Analysis MCQ Quiz - Objective Question with Answer for Break Even Point Analysis - Download Free PDF

Explanation:

Break-Even Point in Cost–Volume Relationship

• In the context of cost-volume-profit (CVP) analysis, the Break-Even Point is a critical concept that represents the level of sales at which total revenue equals total costs. At this point, there is no profit or loss—the business simply "breaks even." This is a fundamental tool for decision-making in finance and management, helping businesses determine the minimum sales volume required to avoid losses.

In graphical representation of the cost–volume relationship:

• The Total Revenue line represents the income generated from selling products or services. It starts at the origin (for zero sales) and increases linearly as the volume of sales increases.
• The Total Costs line represents the sum of fixed costs and variable costs. The fixed costs remain constant, while variable costs increase with the volume of production or sales.

The point where these two lines intersect is the Break-Even Point. At this point:

• Total Revenue = Total Costs
• Profit = 0 (no profit, no loss)

This intersection reflects the exact sales volume required to cover all costs. Any sales beyond this point result in profit, while sales below this point lead to a loss.

Break-even chart:

• The break-even analysis is the study of the cost-volume-profit (CVP) relationship.
• It refers to a system of determining that level of operations where the organization neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect whether the production is large or small).
• For example, rent, tax salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, the larger the variable cost.
• For example, the cost of raw material, cost of labor, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.

Explanation:

Profit Zone:

• The break-even analysis is a vital tool in understanding the financial health of a business. The area between the 'Total Revenue' line and the 'Total Costs' line to the right of the break-even point represents the profit zone. This is the region where a company starts generating profit after covering all its costs (both fixed and variable).

Break-even chart:

• The break-even analysis is the study of cost-volume-profit (CVP) relationship in which a graph is drawn between volume of production (Quantity) and income (Sales).
• It refers to a system of determining that level of operations where the organisation neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost which does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect by whether the production is large or small).
• For example, rent, taxes salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, larger the variable cost.
• For example, the cost of raw material, cost of labour, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.

Explanation:

Break-Even Point

• The break-even point (BEP) is a critical financial concept in business and economics. It refers to the level of sales revenue at which a company's total revenue equals its total costs, resulting in neither profit nor loss. At this point, the business has covered all its expenses, including fixed and variable costs, and begins to generate profit with any additional sales revenue.

Formula:

The break-even point can be calculated using the following formula:

BEP (in units) = Fixed Costs ÷ (Selling Price per Unit − Variable Cost per Unit)

BEP (in sales revenue) = Fixed Costs ÷ Contribution Margin Ratio

At the break-even point:

• Total Revenue = Total Costs: This includes both fixed costs (costs that do not vary with the level of production, such as rent and salaries) and variable costs (costs that vary directly with production, such as materials and labor).
• No Profit, No Loss: The company is not earning a profit, but it is also not incurring a loss. The break-even point is the threshold at which profitability begins.

Importance of Break-Even Analysis:

• Helps businesses determine the minimum sales volume required to avoid losses.
• Provides insights into the relationship between cost, price, and sales volume.
• Assists in setting sales targets and pricing strategies.
• Useful for evaluating the financial viability of new products or projects.

Given:

• Fixed cost = ₹60,000
• Variable cost per unit = ₹210
• Selling price per unit = ₹320
• Rated capacity = 1600 units/month
• Production = 80% of 1600 = 1280 units

Step 1: Total Revenue

$1280\times 320=₹409,600$

Step 2: Variable Cost

$1280\times 210=₹268,800$

Step 3: Total Cost

$₹60,000+₹268,800=₹328,800$

Step 4: Profit

$₹409,600-₹328,800=₹80,800$

Concept:

Break-even analysis is a method used to determine the sales volume required for a company to “break-even”, or experience neither a profit nor a loss on the sale of its product.

The break-even represents the number of units that must be made and sold for income from sales to equal the cost of producing the product.

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price.

BEP in terms of physical unit:

$\mathrm{B}\mathrm{E}\mathrm{P}={\mathrm{X}}_{\mathrm{B}\mathrm{E}\mathrm{P}}=\frac{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{F}\mathrm{i}\mathrm{x}\mathrm{e}\mathrm{d}\mathrm{c}\mathrm{o}\mathrm{s}\mathrm{t}}{\mathrm{C}\mathrm{o}\mathrm{n}\mathrm{t}\mathrm{r}\mathrm{i}\mathrm{b}\mathrm{u}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{p}\mathrm{e}\mathrm{r}\mathrm{u}\mathrm{n}\mathrm{i}\mathrm{t}}=\frac{\mathrm{F}}{\mathrm{s}-\mathrm{v}}$

where F is the fixed cost

s = sales price of one product, v = variable cost of one product

Calculation:

Given:

F = Rs. 10000, s = Rs. 15 and v = Rs. 10

Break-Even Quantity = $\frac{F}{s-v}$

$\therefore BEP=\frac{F}{s-v}=\frac{10000}{15-10}=2000units.$

Explanation:

Breakeven analysis is used to find the minimum level of production required. It evaluates both fixed and variable costs.

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price.

Break-even analysis consists of:

1. Fixed cost (F)
2. Variable cost (V)
3. Sales revenue (S)

$BEP=\left(\frac{F}{S-V}\right)$

From the diagram, the slope of the sales line at BEP will be given by, 

$Slopeofsalesline=\frac{TotalCost}{TotalSalesatBEP}$

At BEP, Total cost = Fixed cost + Variable cost

$Slopeofsalesline=\frac{VariableCost+FixedCost}{TotalSalesatBEP}=\frac{VariableExpenses+ConstantExpenses}{TotalSales}$

Explanation:

Margin of safety:

• The Margin of safety is the difference between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Margin of safety (M/S) ratio is given by,

$\mathrm{M}\mathrm{a}\mathrm{r}\mathrm{g}\mathrm{i}\mathrm{n}\mathrm{o}\mathrm{f}\mathrm{s}\mathrm{a}\mathrm{f}\mathrm{e}\mathrm{t}\mathrm{y}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\left(\frac{\mathrm{M}}{\mathrm{S}}\right)=\frac{Marginofsafety}{Presentsale}=\frac{Sales-Breakevenpointsales}{Presentsale}$

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.
• At the break-even point, the margin of safety ratio is 0.

At the break-even point, Sales = break-even point sales

$\mathrm{M}\mathrm{a}\mathrm{r}\mathrm{g}\mathrm{i}\mathrm{n}\mathrm{o}\mathrm{f}\mathrm{s}\mathrm{a}\mathrm{f}\mathrm{e}\mathrm{t}\mathrm{y}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\left(\frac{\mathrm{M}}{\mathrm{S}}\right)=\frac{Sales-Breakevenpointsales}{Presentsale}=0$​​

Additional Information

Break-even chart:

• The break-even analysis is the study of cost-volume-profit (CVP) relationship.
• It refers to a system of determining that level of operations where the organisation neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

Explanation:

Break-even chart:

• The break-even analysis is the study of cost-volume-profit (CVP) relationship in which a graph is drawn between volume of production (Quantity) and income (Sales).
• It refers to a system of determining that level of operations where the organisation neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost which does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect by whether the production is large or small).
• For example, rent, taxes salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, larger the variable cost.
• For example, the cost of raw material, cost of labour, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.

Concept:

$\mathrm{B}\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{k}\mathrm{e}\mathrm{v}\mathrm{e}\mathrm{n}\mathrm{p}\mathrm{o}\mathrm{i}\mathrm{n}\mathrm{t}=\frac{Totalfixedcost\left(TFC\right)}{Priceperunit\left(P\right)-Variablecost\left(V.C\right)}$

Calculation:

Given:

TFC = Rs. 6000

P = Rs. 7

VC = Rs. 2 per item

$\mathrm{B}\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{k}\mathrm{e}\mathrm{v}\mathrm{e}\mathrm{n}\mathrm{p}\mathrm{o}\mathrm{i}\mathrm{n}\mathrm{t}=\frac{6000}{7-2}=1200$

The correct answer is Number of units sold

Key Points

The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. In other words, you've reached the level of production at which the costs of production equal the revenues for a product.

To calculate your company's breakeven point, use the following formula:

Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units

The breakeven point (BEP) formula is determined by dividing the total fixed costs associated with production by the contribution per unit, i.e, Sale price per unit minus the variable costs per unit. In this case, fixed costs refer to those that do not change depending upon the number of units sold. 

Concept:

Break-even analysis is a method used to determine the sales volume required for a company to “break-even”, or experience neither a profit nor a loss on the sale of its product.

The break-even represents the number of units that must be made and sold for income from sales to equal the cost of producing the product.

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price.

BEP in terms of physical unit:

$\mathrm{B}\mathrm{E}\mathrm{P}={\mathrm{X}}_{\mathrm{B}\mathrm{E}\mathrm{P}}=\frac{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{F}\mathrm{i}\mathrm{x}\mathrm{e}\mathrm{d}\mathrm{c}\mathrm{o}\mathrm{s}\mathrm{t}}{\mathrm{C}\mathrm{o}\mathrm{n}\mathrm{t}\mathrm{r}\mathrm{i}\mathrm{b}\mathrm{u}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{p}\mathrm{e}\mathrm{r}\mathrm{u}\mathrm{n}\mathrm{i}\mathrm{t}}=\frac{\mathrm{F}}{\mathrm{s}-\mathrm{v}}$

where F is the fixed cost

s = sales price of one product, v = variable cost of one product

Calculation:

Given:

F = Rs. 10000, s = Rs. 15 and v = Rs. 10

Break-Even Quantity = $\frac{F}{s-v}$

$\therefore BEP=\frac{F}{s-v}=\frac{10000}{15-10}=2000units.$

Concept:

If x number of units are produced in the system then

Total sale = sx

Fixed cost = F

variable cost = vx

and Profit = P, 

where s is the sale cost per unit and v is the variable cost per unit

Total sale = Total cost + Profit

sx = F + vx + P

At break-even point, Profit (P) = 0

So, sx = F + vx

$x=\frac{F}{s-v}$

Calculation:

Given, F = 12,000 Rs., v = 24 Rs. and s = 48 Rs.

Then,

$x=\frac{12000}{48-24}=500units$

Explanation:

• A breakeven analysis is used to determine how much sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price.
• Break-even point usually means the business volume that balances total costs with total gains. At break-even volume, in other words, total cash inflows equal total cash outflows. At Break-Even, in other words, the net cash flow equals zero.
• At BEP: ​​Total cost = Sales revenue

Break-Even Point:

• It is the volume of production where total cost equal to total sale and an organisation neither earn profit nor suffer from loss
• It is also known as No Profit – No Loss point
   

$\mathrm{B}\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{k}\mathrm{E}\mathrm{v}\mathrm{e}\mathrm{n}\mathrm{P}\mathrm{o}\mathrm{i}\mathrm{n}\mathrm{t}=\frac{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{F}\mathrm{i}\mathrm{x}\mathrm{e}\mathrm{d}\mathrm{c}\mathrm{o}\mathrm{s}\mathrm{t}}{\mathrm{S}\mathrm{e}\mathrm{l}\mathrm{l}\mathrm{i}\mathrm{n}\mathrm{g}\mathrm{c}\mathrm{o}\mathrm{s}\mathrm{t}\mathrm{p}\mathrm{e}\mathrm{r}\mathrm{u}\mathrm{n}\mathrm{i}\mathrm{t}-\mathrm{V}\mathrm{a}\mathrm{r}\mathrm{i}\mathrm{a}\mathrm{b}\mathrm{l}\mathrm{e}\mathrm{c}\mathrm{o}\mathrm{s}\mathrm{t}\mathrm{p}\mathrm{e}\mathrm{r}\mathrm{u}\mathrm{n}\mathrm{i}\mathrm{t}}$

$\mathrm{B}\mathrm{E}\mathrm{P}=\frac{\mathrm{F}}{\mathrm{s}-\mathrm{v}}$

• When sales revenue > total cost ⇒ There will be profit
• When sales revenue < total cost ⇒ There will be a loss

Explanation:

Breakeven analysis is used to find the minimum level of production required. It evaluates both fixed and variable costs.

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price.

Break-even analysis consists of:

1. Fixed cost (F)
2. Variable cost (V)
3. Sales revenue (S)

$BEP=\left(\frac{F}{S-V}\right)$

Break-even point is the point where total cost and sales revenue lines intersect.

Breakeven point (BEP) indicates recovery of both fixed cost and variable cost.

Concept:

$\mathrm{B}\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{k}\mathrm{e}\mathrm{v}\mathrm{e}\mathrm{n}\mathrm{p}\mathrm{o}\mathrm{i}\mathrm{n}\mathrm{t}=\frac{Totalfixedcost\left(TFC\right)}{Priceperunit\left(P\right)-Variablecost\left(V.C.\right)}$

Calculation:

Given:

Total fixed cost (TFC) = 100000, P = 40, VC = 20.

$Breakevenpoint=\frac{100000}{40-20}=5000$.

Hence, the quantity of break-even is 5000 units.