Break-even analysis is a technique widely used by production direction and direction comptrollers. It is based on categorising production costs between those which are “variable” ( costs that alteration when the production end product alterations ) and those that are “fixed” ( costs non straight related to the volume of production ) . Entire variable and fixed costs are compared with gross revenues gross in order to find the degree of gross revenues volume. gross revenues value or production at which the concern makes neither a net income nor a loss ( the “break-even point” ) . Some Related Definitions:
Break Even Analysis:
An analysis to find the point at which gross received peers the costs associated with having the gross. Break-even analysis calculates what is known as a border of safety. the sum that revenues exceed the break-even point. This is the sum that grosss can fall while still remaining above the break-even point.
Break Even Point:
An analysis to find the point at which gross received peers the costs associated with having the gross. Break-even analysis calculates what is known as a border of safety. the sum that revenues exceed the break-even point. This is the sum that grosss can fall while still remaining above the break-even point.
Break Even Price:
The sum of money for which a merchandise or service must be sold to cover the costs of fabrication or supplying it.
Fixed Cost:
A cost that remains changeless. regardless of any alteration in a company’s activity.
Variable Cost:
A cost that changes in proportion to a alteration in a company’s activity or concern.
Contribution Margin:
A cost accounting construct that allows a company to find the profitableness of single merchandises.
It is calculated as follows:
Product Revenue – Product Variable Costs Product Revenue
The phrase “contribution margin” can besides mention to a per unit step of a product’s gross runing border. calculated merely as the product’s monetary value minus its entire variable costs.
Margin of Safety:
Margin of safety is how much end product or gross revenues degree can fall before a concern reaches its breakeven point.
Break Even Chart:
Chart where gross revenues gross. variable costs. and fixed costs are plotted on the perpendicular axis while volume is plotted on the horizontal axis. The break-even point is the point where the entire gross revenues gross line intersects the entire cost line.
Uses of Break Even Point:
oHelpful in make up one’s minding the minimal measure of gross revenues
oHelpful in the finding of stamp monetary value
oHelpful in analyzing effects upon organization’s profitableness oHelpful in make up one’s minding about the permutation of new workss
oHelpful in gross revenues monetary value and measure
oHelpful in finding fringy cost
Restrictions of Break Even Point:
oBreak-even analysis is merely a supply side ( costs merely ) analysis. as it tells you nil about what gross revenues are really likely to be for the merchandise
at these assorted monetary values. oIt assumes that fixed costs ( FC ) are changeless
oIt assumes mean variable costs are changeless per unit of end product. at least in the scope of likely measures of gross revenues. oIt assumes that the measure of goods produced is equal to the measure of goods sold ( i. e. . there is no alteration in the measure of goods held in stock list at the beginning of the period and the measure of goods held in stock list at the terminal of the period. oIn multi-product companies. it assumes that the comparative proportions of each merchandise sold and produced are changeless.
Problem on Break Even Analysis and Break Even Chart:
Problem – 1
Gross saless of Keya Company for the twelvemonth 2007 were Tk. 4. 00. 000. Fixed disbursals was Tk. 90. 000 and variable disbursals totaled Tk. 2. 20. 000. Contribution border Tk. 180. 000.
Required:
( I ) Contribution Margin Ratio.
( two ) The Break-even point in Taka.
( three ) Margin of safety Sale.
( four ) Margin of safety Ratio.
( V ) Net income for the twelvemonth 2007.
Solution:
Contribution
( I ) Contribution Margin Ratio = ——————- ? 100
Gross saless
1. 80. 000
= ——————- ? 100
4. 00. 000
= 45 %
Fixed Cost
( two ) Break-even point in ( Tk. ) = ———————-
C/M Radio
90. 000
= ———————-
45 %
= Tk. 2. 00. 000
( three ) Margin of safety Gross saless = Entire sale – Break-even Gross saless
= Tk. 4. 00. 000 – 2. 00. 000
= Tk. 2. 00. 000
Margin of safety gross revenues
( four ) Margin of safety Ratio= —————————- ? 100
Entire Gross saless
Tk. 2. 00. 000
= ———————— ? 100
Tk. 4. 00. 000
=50 %
( V ) Net income for the year= Margin of safety gross revenues ? C/M Ratio.
= Tk. 2. 00. 000 ? 45 %
= Tk. 90. 000.
Problem – 2
Webb Company has used direct costing in fixing the undermentioned income statement:
Tk.
Entire Gross saless 5. 00. 000
Less: Variable Cost 3. 00. 000
Contribution Margin 2. 00. 000
Less: Fixed cost 1. 60. 000
Net income 40. 000
—————-
Here. entire units = 5000
Required: Contrast a interruption even chart from this information and place the interruption
event point on the chart.
Solution:
Here.
Entire Contribution
Contribution per Unit = ———————–
Entire Unit of measurements
200. 000 = ———————–
5. 000
= Tk. 40
Contribution
( I ) Contribution Margin Ratio = ——————- ? 100
Gross saless
2. 00. 000
= ——————- ? 100
5. 00. 000
= 40 %
Fixed Cost
( two ) Break-even point in ( Tk. ) = ———————-
C/M Ratio
160. 000
= ———————-
40 %
= Tk. 4. 00. 000
Fixed Cost
( three ) Break-even point in ( Tk. ) = —————————
Contribution per unit
160. 000
= ———————-
40
= 4. 000 Unit of measurements ( four ) Margin of safety Gross saless = Entire sale – Break-even Gross saless
= Tk. 5. 00. 000 – 4. 00. 000
= Tk. 1. 00. 000
Margin of safety gross revenues
( four ) Margin of safety Ratio= —————————- ? 100
Entire Gross saless
Tk. 1. 00. 000
= ———————— ? 100
Tk. 5. 00. 000
= 20 %
( V ) Net income for the year= Margin of safety gross revenues ? C/M Radio.
= Tk. 1. 00. 000 ? 40 %
= Tk. 40. 000.
Decision:
Break-even analysis is utile as a first measure in developing fiscal applications. which can be used in invoicing and budgeting. The chief intent of this analysis is to hold some thought of how much to sell. before a net income will be made. Break-even analysis is highly of import before get downing a concern ( or establishing a new merchandise ) because it gives replies to important inquiries such as “how sensitive is the net income of the concern to lessenings in gross revenues or additions in costs” . This analysis can be besides extended to early phase concern in order to find how accurate the first anticipations were and supervise whether the house is on the right way ( the 1 that leads to net incomes ) or non.
