Livestock Economics, Marketing and Business Management

BREAK EVEN ANALYSIS

Break-even point

• Break-even point is the output level corresponding to minimum point of average total cost.
• A farmer must produce at least this amount of product to cover the total cost of production.
• Whatever is produced above this point will be the profit for the farmer.
• Point where the farmer recoups his investment is the Break-even point.
• Investment is in the form of fixed cost and variable cost, which constitutes the total cost.
• When the total cost is equal to total revenue it is Break-even point. It can be calculated by,

Service charge = How much one gets by selling an individual unit of output.

• Break-even point nearer to the origin indicates less loss and more profit zones.
• Break-even point away from the origin indicates more and more loss zone and less and less profit zone.
• Nearness of Break even point to the origin also indicates whatever the farmer is producing is market worthwhile.
• Due to this the farmer will recoup his investment even by producing less number of units of output.
• Break even point away from the origin indicates to recoup the investment the farmer has to produce larger number of units of output which is an indication that whatever the farmer is producing is not so market worthwhile.
• Find out the break even point of a sheep herd with following information.
  • Total fixed cost =Rs.10000, Number of sheep =100. Variable cost of production = Rs.60000, Gross return =Rs.100000
  • Break Even point or output= 10000/{(100000/100)-(60000/100)}= 25 sheep.
    

Shut down point

• Shut down point is the output level corresponding to minimum point of average variable cost.
• A farmer must produce at least this amount so that he will be able to cover the variable cost of production.
• If the total revenue curve goes below this point, it is better to close the business instead of incurring losses. So this point is called as Shut down point.

Margin of Safety = Output – BEO

Particulars	Problem 1	Problem 2	Problem 3	Problem 4	Problem 5
Total Variable Cost	Rs.16,000		Rs.40,000	Rs.60,000	Rs.6
Total Cost	Rs,24,000	Rs.30,000	Rs.50,000		Rs.8,000
Total Fixed Cost		Rs.10,000		Rs.10,000
Milk Production	3,000 lts	3,500 lts
Gross Income	Rs.30,000	Rs.35,000	Rs.60,000	Rs.1,00,000
Meat Production			500 Kg.	100
Number of sheep					100
Service charge					Rs.15/unit