Breakeven Analysis

BREAK EVEN abridgment Break-even is the caput at which a product or service stops terminationsing m atomic number 53y to score and sell, and starts generating a profit for your business. This means sales have pass alonged sufficient volume to sink in the protean and decided personifys of producing and distributing your product. Type the document subtitle KOMAL BHILARE ROLL NO 85 2013 DEFINITION Break Even is the sales point at which the Company incompletemakes profit nor suffers loss, or sales level where fixed cost argon fully absorbed by or the level where contribution margin equals the fixed cost.Breakeven abstract provides selective information for profit planning policy formulating and decision making Break-even analysis may be based on historical data, past ope proportionalityns, or future sales and be, Depending on managements need and desire. The get by even analyses technique is used in variousbusiness decision making atomic number 18as, as this assist in kn owing the minimum desired level to be achieved to avoid loss situation. The Breakeven analysis is largely used at the time ofinvesting in new project and introducing new products. The organizer of this shop must have seen Breakeven for this workshop. USE OF BREAK EVENANALYSES ?Hospital or Hotel management would deal to know salespoint in terms of military issue of beds/ rooms, to recover fixed cost to reach at a breakeven point. ?The school owner would be concerned in knowing minimum number of students to be admitted to reach atbreakeven ?New branch of bank would need to know minimum deposits from node ?On introduction of new products certain huge salespromotional expenses are planned in order to achieveplanned sales. The management while deciding about approving expenditures would be interested to see cost / benefit analyses or minimum expected sales (break even) to be achieved to recover these expenses (disregarding the very(prenominal) ambitious sales budgets submitted by th e sales and marketing team) FORMULA A) Breakeven point of output = (fixed cost) / (contribution per unit) Where, voice= change cost variable cost Fixed cost= Contribution -profit B) Breakeven point of gross revenue = 1. Fixed bell x SP per unit Contribution per unit 2.Fixed Cost x Total Sales Total Contribution BREAK EVEN GRAPH Uses of Breakeven Chart A breakeven chart wad be used to image the effect of changes in any of the following profit factors Volume of sales Variable expenses Fixed expenses change price PROFIT VOLUME RATIO (P/V RATIO) The proportion of contribution to sales is P/V ratio or C/S ratio. It is the contribution per rupee of sales and since the fixed cost stay constant in short term period, P/V ratio will also bank bill the rate of change of profit due to change in volume of sales.The P/V ratio may be expressed as follows P/V ratio = Sales Marginal cost of sales = Contribution Sales Sales = Changes in contribution = Change in profit Changes in sales C hange in sales A fundamental property of marginal costing strategy is that P/V ratio remains constant at different levels of activity. A change in fixed cost does not affect P/V ratio. The concept of P/V ratio helps in determining the following Breakeven point Profit at any volume of sales Sales volume required to earn a desired quantum of profit Profitability of products Processes or departments the contribution can be increased by increasing the sales price or by reduction of variable costs. MARGINAL COST A marginal cost is another term for a variable cost. The term marginal cost is usually applied to the variable cost of a unit of product or service, whereas the term variable cost is more commonly applied to resource costs, such as the cost of materials and labour hours.Marginal costing is a form of management accounting based on the distinction amongst a. the marginal costs of making selling goods or services, and b. fixed costs, which should be the same for a assumption period of time, regardless of the level of activity in the period. Suppose that a unbendable makes and sells a iodine product that has a marginal cost of ? 5 per unit and that sells for ? 9 per unit. For every additional unit of the product that is made and sold, the firm will incur an extra cost of ? 5 and receive income of ? 9. The illuminate gain will be ? 4 peradditional unit.This net gain per unit, the difference between the sales price per unit and the marginal cost per unit, is called contribution. Contribution is a term meaning making a contribution towards covering fixed costs and making a profit. Before a firm can make a profit in any period, it must first of all cover its fixed costs. Breakeven is where total sales revenue for a period just covers fixed costs, leaving neither profit nor loss. For every unit sold in excess of the breakeven point, profit will increase by the amount of the contribution per unit LIMITATIONS OF BREAK EVEN ANALYSIS It is best suited to the a nalysis of one product at a time. * It may be difficult to classify a cost as all variable or all fixed and there may be a mark to continue to use a break even analysis after the cost and income functions have changed. * Break-even analysis is only a supply side (i. e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices. * It assumes that fixed costs (FC) are constant. Although this is professedly in the short run, an increase in the scale of production is likely to cause fixed costs to rise.