Spice Jet

TABLE OF CONTENTS

1. Break Even Analysis...................................................................04

Objectives ......................................................................05

Assumptions...................................................................05

Fixed, Variable and Semi Variable Costs............................05

Methods used for calculating break-even costs..................07

Advantages and Limitations.............................................09

Contribution Margin........................................................11

2. OVERVIEW OF THE INDUSTRY.....................................12

Low Cost Carriers...........................................................12

History of Indian Aviation................................................13

The Current Scenario......................................................14

3. SPICEJET...........................................................................18

4. CALCULATION AND ANALYSIS OF BREAKEVEN ..................26

5. CONSIDERATIONS AND RECOMMENDATIONS......................31

6. REFERENCES....................................................................32

BREAK EVEN ANALYSIS - AN INTRODUCTION

One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar sales. That is, the break-even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break-even sales indicates the dollars of gross sales required to break-even.

It is important to realize that a company will not necessarily produce a product just because it is expected to breakeven. Many times, a certain level of profitability or return on investment is desired. If this objective cannot be reached, which may mean selling a substantial number of units above break-even, the product may not be produced. However, the break-even is an excellent tool to help quantify the level of production needed for a new business or a new product.

The basic equation for determining the break-even units is:

Average Annual Fixed Cost

(Average Per Unit Sales Price - Average Per Unit Variable Cost)

The basic equation for determining the break-even sales:

Annual Fixed Cost

1 - (Average Per Unit Variable Cost ч Average Per Unit Sales Price)

OBJECTIVES:

* Break-even analysis can be very helpful in the evaluation of a new venture. In most instances, success takes time. Many new enterprises and products actually operate at a loss (at a point below break-even) in the early stages of development.

* Knowing the price or volume necessary to break-even is critical to evaluating the time-frame in which losses are permissible.

* The break-even is also an excellent benchmark by which a company's short-term goals can be measured/tracked.

* Break-even analysis mandates that costs be analyzed. It also keeps a focus on the connection between production and marketing.

* Should one make , buy or lease capital investment

* What happens to revenues and costs if the price of one of a company's product is hanged.

ASSUMPTIONS:

* All costs are either perfectly variable or absolutely fixed over the entire period of Production but this assumption does not hold good in practice.

* The volume of production and the volume of sales are equal but in reality they differ.

* The revenue is perfectly variable with the physical volume of production and this assumption is not valid.

* The assumption of stable product mix is realistic.

Break-even analysis is based on two types of costs: fixed costs and variable costs.

FIXED COSTS:

Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business.

VARIABLE COSTS:

Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples.

Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labour costs.

SEMI-VARIABLE COSTS:

Whilst the distinction between fixed and variable costs is a convenient way of categorising business costs, in reality there are some costs which are fixed in nature but which increase when output reaches