UNIT 16 BREAK EVEN ANALYSIS

 

UNIT 16 BREAK EVEN ANALYSIS

 

The concept of break even analysis is a logical extension of marginal costing. It is based on the same principle of classifying the costs into fixed and variable. 

The study of cost-volume-profit relationship is some time called as “break even analysis. 

Break even analysis can be interpreted in two senses – narrow and broad sense. In narrow sense, it refers to determine the level of output where total costs equal to total revenue i.e. no profit, no loss. In the broad sense, it is used to determine the probable profit at any level of output.

 

BREAK EVEN POINT

It is a point where sales revenue equals the costs to make and sell the product and no profit or loss is reported.

 

Charles T. Horngren define it, “the breakeven point is that point of activity (sales volume) where total revenues and total expenses are equal, it is the point of zero profit and zero loss.”

 

There are two methods of calculating breakeven point. Mathematical method and Graphical method.

1. Mathematical Method

The breakeven point through mathematical method can be found out either by

i) Equation Method, or

ii) Contribution Margin Technique.

1. Equation Method

Sales – Variable costs – Fixed cost = Profit (S --- VC – FC = P)

BEP (in units) =Fixed Costs / (SP per unit – VC per unit)

or

BEP = Fixed Costs/Contribution Per Unit

2. Graphical Method

The break-even point can also be shown graphically. The BEP chart shows the relationships between cost, volume and profit at various levels of output. Fixed costs, variable costs and sales revenues are shown on Y-axis and volume of out on X-axis. The break-even point is that point at which the total cost line and total sales line intersect each other. This point represents “no profit, no loss”.

 

REQUIRED SALES FOR DESIRED PROFIT

 

(Fixed Costs + Desired Profit)/P/V Ratio

 

 

MARGIN OF SAFETY

 

The margin of safety is the difference between actual sales and sales at break even point.

 

M/S = Actual Sales – Sales at BEP

 

Margin of safety can also be computed from profit and P/V ratio, which is

 

M/S = Profit / (P/V Ratio)

 

ANGLE OF INCIDENCE The angle formed at the intersection of the total sales revenue line and the total cost line is called the angle of incidence.

 






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