Understanding Break-Even Analysis in Business
Break-even analysis is crucial for businesses to determine the point where costs and revenues are equal, resulting in zero net income. It helps in profit forecasting, planning, and investment analysis. The analysis involves studying costs, revenues, and sales to identify the break-even point, which indicates the level of sales required to cover all expenses. There are different methods to calculate the break-even point, whether in terms of physical units or monetary value.
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Cost concepts and cost-output relationship. Break even analysis is of vital importance in determining the practical application of cost function. The company executive in profit forecasting and planning and also to the investment analysis, labour unions and government agencies for other purposes.
Break even analysis is a study of costs, revenues and sales of a firm and finding out the volume of sales where the firms costs and revenues will be equal. The break even point is that level of sales where the net income is equal to zero. The break even point is the zone of no-profit and no-loss, as the costs equal revenues.
The break even point of a firm can be out in two ways. I. Physical unit II. Money value
This method is convenient for a firm production a single product. The BEP is the number of units of the commodity that should be sold to earn enough revenue just to cover all the expenses of production.
Output in units Total revenue : (price Rs.4/-) per unit Total fixed cost Total variable cost Total cost Rs. 300 300 300 300 300 300 300 Rs. 0 300 300 900 1200 1500 1100 Rs. O 100 200 300 400 500 600 0 300 600 600 1200 1500 1800 2100 400 800 1200 1600 2000 2400
There is another method of finding out BEP in terms of physical units of output. Average revenue and average cost instead of TR and TC. The break even point is that level of output at which the price of the product covers the average cost.
The contribution margin= total revenue minus total cost total revenue The break - even point = total fixed cost contribution ratio = 300 0.25 = Rs. 1,200/-
The price is assumed to be constant All revenue is perfectly variable with the physical volume of output.
Safety margin The break even chart will help the management to find at a glance the profit generated at various level of output. Safety margin= (sales- BEP) x 100 sales Safety = 500- 300 X 100 500 = 40%
The break even analysis is will help the management in finding out the level of output and sales in order to reach the target of profit fixed. Target sales volume = fixed cost+ target profit Contribution margin per unit
new sales volume = total fixed cost X total profit New selling price- average variable cost New sales volume = 800X 20,000 7- 4 = 9,330
It is static in character. Projection of future with the past is not correct. The assumption that cost- revenue output relationship is linear is true only a small range of output.
