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Module-3 Breakeven Analysis

Break-even analysis is a technique that determines the sales level at which total revenue equals total expenses, indicating no profit or loss. It has merits such as explaining cost-volume-profit relationships and aiding in short-run decisions, but also has demerits, including potential misleading conclusions and unrealistic assumptions about costs. The analysis is important for forecasting profits, evaluating performance, formulating pricing policies, and making investment decisions.

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4 views2 pages

Module-3 Breakeven Analysis

Break-even analysis is a technique that determines the sales level at which total revenue equals total expenses, indicating no profit or loss. It has merits such as explaining cost-volume-profit relationships and aiding in short-run decisions, but also has demerits, including potential misleading conclusions and unrealistic assumptions about costs. The analysis is important for forecasting profits, evaluating performance, formulating pricing policies, and making investment decisions.

Uploaded by

ansonbvilson37
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BREAK EVEN ANALYSIS

Define Break even analysis and state its merits and demerits.
Break-even analysis is the study of relationship between cost, volume and profit at different levels of
sales or production. It refers to a technique of determining that level of operations where total revenue
equals total expenses; that is the point of no profit, no loss. The break-even point of a company is the
level of sales income which will equal to the sum of its fixed and variable costs. At break-even; sales
are equal to fixed cost plus variable cost.

ASSUMPTIONS
Variable cost remains constant per unit of output irrespective of the level of output.
Fixed cost remains constant at all volumes of output.
There is coordination between production and sales.
Volume of production is the only factor that influences cost
There will be no change in general price level.

BREAK-EVENCHART

BREAK EVEN POINT (MATHEMATICAL METHOD)

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠


𝐵𝐸𝑃 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

Where, Contribution= Selling Price – Variable cost

MARGIN OF SAFETY

It is the difference between actual sales and breakeven sales. It denotes the level of safety that company
enjoys before company incurring losses. Higher margin of safety provides freedom to the management
of the company to change the selling price of their product in order share market share from its
competitors.

Margin of Safety=Actual sales–Break-even sales


Merits Demerits

1. It explains the relationship between cost, It may give misleading decisions of


volume and returns. production capacity changes.
2. It indicates the lowest amount of business The total fixed cost may not remain constant
activity to prevent losses. after a certain level of output as assumed by
It helps a firm in making its short –runbreak-even analysis.
3. tactical decisions The assumption that variable cost per unit
remains constant is unrealistic.

IMPORTANCE OF BREAK EVEN ANALYSIS


It is helpful in forecasting the profit accurately which is essential to determine the relationship between
cost and revenue.
It helps the management in the evaluation of performances for control purposes.
It may be helpful in formulating pricing policies by studying the effect of prices on cost and profits.
It is helpful in making short term goals for the business.
It helps a firm in formulating future business investment decisions.

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