Illustration 2
Monotonous Co., manufactures and sells a single variety of a product. For 2007-08, the Management Accountant estimated the following profit levels depending upon the different quantities of the product manufactured and sold:
|
Sales Quantity ('000 units)
|
Sales Value
Rs. in lakh
[Selling Price = Rs.10]
|
Total Costs
Rs. in lakh
|
Profit/(Loss)
Rs. in lakh
|
|
20
|
2.0
|
3.6
|
(1.6)
|
|
25
|
2.5
|
3.7
|
(1.2)
|
|
30
|
3.0
|
3.8
|
(0.8)
|
|
35
|
3.5
|
3.9
|
(0.4)
|
|
40
|
4.0
|
4.0
|
-
|
|
45
|
4.5
|
4.1
|
0.4
|
|
50
|
5.0
|
4.2
|
0.8
|
Solution
As seen from above when 20,000 units are sold, there is a loss of Rs.1.6 lakh. However, as more and more units are sold the loss goes on decreasing. When sales are 40,000 units there is no loss. When sales increase beyond 40,000 units the firm earns a profit.
The above situation can be represented on a graph as follows:
Graph
The graph shows that when sales quantity is 40,000 units the Sales Value Line and the Total Cost Line intersect at a point BEP. This point is called the Break Even Point. On the X-axis the BEP indicates that when sales quantity is 40,000 units, Total Cost equals Sales Value. On the Y-axis BEP indicates that Total Cost equals Sales Value when each of these amounts is Rs.4 lakh.
The Break Even Point is a kind of borderline. If sales are less than break even sales, the company incurs a loss. If sales are more than break even sales, the company earns a profit.
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