Page 173 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes Self Assessment

State whether the following statements are true or false:
6. Quality is not an important function of production/operation management.
7. Quality is to be maintained at all the stages of production.

8. Quality is conformance to requirements.
9. ISO 9000 deals with standardization of quality definitions.
10. ISO 9003 deals with Measurement and quality systems guidelines.

11.3 Break Even Analysis

Break-even analysis shows the relationship between costs and profits with the sales volume. It
determines the activity where total cost is equal to total sales i.e. point of zero profit and zero
loss. It can be used to determine probable profits at any level of activity.

Mathematical Calculation of Break-even Analysis:
Fixed Cost
Break-Even Point ( )=
`
P/V Ratio
Fixed Cost
Break-Even Point (Units)=
Contribution per Unit
Contribution
P/V Ratio= × 100
Net Sales
Contribution = Sales – Marginal Cost

Margin of Safety = Actual Sales Revenues – Break-even Sales Revenue
Marginof Safety
Margin of Safety Ratio =
Actual Sales( ) `
Profit = Margin of Safety × P/V Ratio

Break-even Graphics

Break-even graphic representation depicts the relationship between costs, volume and profits. It
not only shows BEP but also the effects of costs and revenue at varying levels of sales.
Assumptions regarding BEP graph:
1. Cost can be divided into variable and fixed component.

2. Fixed cost remains constant during relevant volume range of graph.
3. Variable cost per unit will remain constant during relevant volume range of graph.
4. Selling price per unit will remain constant irrespective of quantity sold with the relevant
range of graph.
5. In case of multi-product company even sales mix remains constant.
6. Production and sales volumes are equal.

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