VAE 511: Livestock Entrepreneurship (1+0)

BREAK EVEN ANALYSIS

• In any business, there is a point where total costs become equal to total revenues and that point is called as Break Even Point and the corresponding output is known as Break Even Output (BEO).
• This means that at this point, the business is making no profit/no loss.
• Break even point is the minimum point of average total cost.
• A farmer must produce atleast this amount of product to cover the total cost of production.
• Whatever is produced above this point will be the profit for the farmer.
• The point where the farmer recoups his investment is the Break Even Point.

There are two approaches to measure the Break Even Point:

• Linear Approach
  • Here the sale price of output remains constant for all the output sales.
  • Here the total cost curve and the total revenue curve are linear that is these two curves are straight lines, where the total revenue curve cuts the total cost curve in the Break even point and the corresponding output is known as Break even output .

Break Even Point = Total Fixed Cost/(Selling Price per Unit of Output – Variable Cost per Unit of Output)

 

• Margin of safety
  • The margin of safety of a farmer is the difference between its normal capacity and break even output.
  • Margin of safety indicates the shock absorbing capacity of the farmer in times of risk and uncertainty.
  • In other words it reflects the financial strength of the enterprise.
  • Margin of safety = Normal capacity – Break even output
  • Margin of safety in monetary terms = Revenue of the total output – Revenues from Break even output.
• Curvilinear approach
  • Here the total revenue changes over the period of time, since the price changes, one output sales to the other.
  • Generally the curvilinear approach is used for perennial crops and also in business where the gestation period is very long.

Shut down point

• Shut down point is the minimum point of average variable cost.
• A farmer must produce atleast 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.