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Break even analysis

Break even analysis is a techinique widely used by production management and management
accounts total variable and fixed costs are composed with sales revenue in order to determine the
level of sales volume , sales value or production at which the business makes neither a profit or loss

Meaning

A Break even analysis is a financial tool which helps you to determine at what stage your company or
new service or a product , will be profitable.

Calculate break even analysis

1. To calculate a break-even point based on units divide fixed costs by the revenue per unit
minus the variable cost per unit
2. When determining a break-even point based on sales dollars : divide the fixed costs by the
contribution margin .

Which type of method is a break even analysis

Break even analysis is a method that is used by most of organisations to determine , a relationship
between costs, revenue and their profits at different levels of output.’

It helps in determining the point of production at which revenue equals the costs.

The basic idea behind doing a Break even analysis is to calucalte the point at which revenues began
to exceed costs .,

Example : fixed cost include rent , insurance premium or loan payments variable costs are costs that
change with the quantity of output

They are zero when production is zero

Nature of Break even analysis

Break even analysis is an analytical technique used to study cost- volume profit relationship and to
determine the point at which revenue and costs agree exactly .

Significance of Break even analysis as tool of financial decision

 Break even analysis serves as the most useful and important managerial tool to study cost-
output profits relationships at varying levels of output .
 This will enable the top management to plan its operational strategies.
 A Finance manager can also make use of this analysis while estimating profits at various
levels of sales and production

Limitations of Break even analysis

Utility of the Break even analysis can be realised only when it is interpreted wisely and used carefully
because the analysis is founded on several unrealistic assumption .

Break even analysis is a short run analysis of costs – volume relationships which will change in
correspondence with variation in costs of material and labour and the introduction of new methods
of production or with the installation of new equipment .

In view of this , such analysis may not process very useful to rapidly growing companies and which
frequently change their product mis or methods of production and whose material and labour costs
change very widely.

Break even analysis is not suited to deal with cost profit -output relationships in respect of multi-
products .