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BREAK-EVEN ANALYSIS

COST OF PROJECT
Cost of Project represents the total of all items of outlay associated with a project which are supported by long-term funds. It is the sum of the outlays on:

Land and site development Buildings and civil works Plant and machinery Technical know-how and engineering fees Expenses on foreign technicians and training of Indian technicians abroad Miscellaneous fixed assets Preliminary and capital issue expenses Pre-operative expenses Margin money for working capital Initial cash losses

Land and Site Development Cost of Land and site development includes:

Basic cost of land including conveyance and other allied charges Premium payable on leasehold and conveyance charges Cost of laying approach roads and internal roads Cost of tube wells

Buildings and Civil Works

It covers:

Buildings for the main plant and equipment Buildings for auxiliary services like steam supply, workshops, laboratory, water supply etc. Godowns, warehouses and open yard facilities Non-factory buildings like canteen, guest houses, time office, excise house, etc. Quarters for essential staff Garages Sewers, drainage, etc. Other civil engineering works

Plant and Machinery Cost of plant and machinery consists of:

Cost of imported machinery

FOB (free on board) value Import duty Clearing, loading, unloading and transportation charges

Cost of indigenous machinery

FOR (free on rail) cost Sales tax, octroi and other taxes Railway freight and transport charges to the site

Cost of stores and spares Foundation and installation charges

Technical Know-How and Engineering Fees Amount payable to technical consultants or collaborators from India and/or abroad for their advice and help in various technical matters.

Expenses on Foreign Technicians and Training of Indian Technicians Abroad

It includes:

Salaries and allowances payable to foreign technicians Expenses on their travel , boarding and lodging Expenses on Indian technicians who require training abroad

Miscellaneous Fixed Assets

Fixed assets and machinery which are not part of the direct manufacturing process It includes:

Furniture Office machinery and equipment Tools Vehicles Transformers Laboratory equipment, etc.

Preliminary and Capital Issue Expenses Preliminary expenses:

Expenses incurred for identifying the project, conducting the market survey, preparing the feasibility report, drafting the memorandum and articles of association and incorporating the company. Expenses incurred on raising of capital from the public.

Capital issue expenses:

Pre-Operative Expenses

Establishment expenses Rent, rates and taxes Travelling expenses Interest and commitment charges on borrowings Insurance charges

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Margin Money for Working Capital The principal support of working capital is provided by commercial banks and trade creditors. A certain part of the working capital requirement has to come from long-term sources of finance. It is referred to as the margin money for working capital.

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Initial Cash Losses Most of the projects incur cash losses in the initial years. Promoters typically do not disclose the initial cash losses. A provision should be made for the estimated initial cash losses in the project cost. Failure to do so affects the liquidity position and impairs the operations.

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COST OF PRODUCTION Components of cost of production are:

1. Material cost 2. Utilities cost 3. Labour cost

4. Factory overhead cost

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COST OF PRODUCTION
Material cost :

It comprises of the cost of raw materials, chemicals, components and consumable stores required for production. It is a function of the quantities in which these materials are required and the prices payable for them. It consists of power, water and fuel Cost of all the manpower employed in the factory. It is a function of the number of employees and the rate of remuneration. Expenses on repairs and maintenance, rent, taxes, insurance on factory assets, etc.

Utilities cost :

Labour cost :

Factory overhead cost :

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BREAK-EVEN ANALYSIS

Break-even analysis determines how much should be sold to ensure that the project does not lose money Sales revenues and total costs are analysed for each different level of production

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BREAK-EVEN POINT

Minimum quantity at which loss is avoided Point where total revenue equals to total costs TR = TC No profit, no loss situation

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COSTS Total cost includes fixed cost and variable cost

Fixed costs- Costs that do not change in response to changes in sales volume. executive salaries lease payments depreciation
Variable costs- Costs that change in response to changes in sales volume. hourly wages raw materials cost

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COMPUTING BREAK-EVEN POINT

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

BEP = Fixed Costs __ Contribution Margin

= Fixed Costs______________________ Selling price per unit Variable Cost per unit

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CONTRIBUTION MARGIN

The contribution margin is the amount of money that is available from the sale of each unit to cover the fixed costs of the firm. Once those fixed costs are covered, any further units that are sold will result in profit.
Contribution Margin=Selling Price-Variable Cost

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CONTRIBUTION MARGIN The following diagram illustrates the definition of contribution:

Profit Contribution

Sales revenue
Variable costs

Fixed costs

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EXAMPLE
A teddy bear manufacturing company sells its bears to retailers for an average price of Rs.180. The variable costs are Rs.30 per bear. The companys fixed costs are Rs.1,50,000. To calculate the break-even point, we first need to find the contribution margin: Contribution Margin =Selling Price Variable Costs =Rs.180 Rs.30 =Rs.150 We can now calculate the break-even point: BEP = Fixed Costs Contribution Margin = Rs.150,000 Rs.150 = 1,000 bears

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BREAK-EVEN CHART

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TYPES OF BREAK-EVEN ANALYSIS Break-even analysis can be explained in two ways:

Accounting Break-Even Analysis

Financial Break-Even Analysis

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Any Queries????

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