Page 174 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT
P. 174
Unit 11: Production Management
Notes
Notes Break-even point helps in determining how many units should be sold in order to
break even at a given selling price.
BEP is an effective management tool as it provides insights into the effects of interrelationship
of factors which influences profits of the project. The relationship between cost, volume and
profit makes up the profit structure of the project. It is very useful for budgeting and profit
planning.
Profit Volume Graph: It shows the relationship between profit and volume. It is also called as
P/V graph. It is constructed as follows:
1. Select an appropriate scale for sales volume on horizontal axis. It will be called sales line.
This line is drawn in the middle region so that both profits and losses can be depicted.
2. Select an appropriate scale for profit and loss (fixed cost) on vertical axis. Fixed cost is
below the sales line on left hand side of vertical axis and profits are shown on the right
hand side above the sales line.
3. Points are plotted on P/V graph for required FC and profit at 2-3 assumed sales levels.
Profits are selected in such a way that one profit is above sales and the below the sales line.
4. Origin of the curve is a point of total fixed cost at zero level of sales.
5. Now if we join the points of origin with two points developed as per step 3 by a diagonal
line which crosses the sales line, the intersecting point is Break Even Point (BEP).
Figure 11.2: Break Even Analysis
Break-even Point
Source: Lall Madhurima and Sahai Shikha (2008), “Entrepreneurship”, Excel Books Pvt. Ltd.
Self Assessment
Fill in the blanks:
11. …………………shows the relationship between costs and profits with the sales volume.
12. Break-even graphic representation depicts not only shows …………………but also the
effects of costs and revenue at varying levels of sales.
13. Points are plotted on ………………… graph for required FC and profit at 2-3 assumed
sales levels.
LOVELY PROFESSIONAL UNIVERSITY 169
