RIM Le EMTEETE LET Break Even Analysis Erneta) tis the point at which the total costs of a firm is equal to the total revenue. itis referred as the "No Profit No Loss” point. It is important to managers because it gives them an id: about the least number of units they must sell in order to at least cover its costs and prevent from incurring any loss. The lower the BEP, the better it is for the firm. This is because, by selling a smaller number of units, the firm is able to cover its cost. Break-even point (in units) This is the number of units which must be sold to achieve the break-even point. Pee) This is the amount of sales required to achieve the break-even point It is the difference between the selling price per unit and the variable cast per unit. It is called contribution because it first contributes towards covering the fixed cost and then towards making profit. The higher the contribution, the better itis for the business. Itis the cast that remains fixed over a certain range of output. It does not vary with production or output. E.g. Rent of premises, Supervision cost ete. Itis the cost that varies with output. If production js zero, variable cost is also zero, E.g, Direct labor, Materials, etc e 2 E 3 3 4 ' § 3 Semi-Variable Cost itis the cost that is partly fixed and partly variable. Its fixed part doesn't vary with output but its variable part charges with cutput. Eg. Telephone bills (because it has the line charge which is fixed and minutes used is the variable part) WERE Ls] \tis the difference between the total units sold and the break-even point in units, The nigher the margin of safety, the greater is the profit and the better its for the firm Scanned with CamScannerSegue 1. Contribution per unit = Selling price per unit - Variable cost per unit. 2. BEP (i its) Tistal Fixed Cost “ in units = — ( Contribution per unit Total Fixed Cost 3. BEP(in sales value) = ——$—‘ x Selling price per unit ( ) Contribution per unit BP P 4, Margin of safety = Total sales in units — Break-even point in units. 5. Profit = Total contribution — Fixed Cost 6. Unit sales to attain target profit Fixed cost + Tar, Contribution pe 7. Sales volume to attain target profit Total Fixed Cost+Target Profit buti, x Selling price per uni Contribution per unit gpl per unit ° Scanned with CamScannerConan Break Even Analysis Evaluate break even analysis as a tool for management decision making process. Break even analysis is a tool that allows management to forecast profit/loss at different levels of output. It also helps businesses to calculate the amount of output needed to avoid incurring a loss. It alds management to break down costs into fixed, variable and semi-variable ones. It is also useful because it helps to Identify the margin of safety and the angle of incidence. he However, all the figures used in break-even analysis are only predictiéiis and actual figures might vary and give different results. It assumes a linear cost and revenue curves, whereas discounts are often allowed or received in bulk sales or purchases. Thus, actual curves might not be linear and vary from predicted ones. Break-even analysis also assumes that all of the output Is sold, but actual sales may be affected by external factors such as economic boom and recession, fashion and taste, etc. Overall, it can be said that break-even analysis is an effective and useful tool for management decision making process. Page 75 Emdadul Hague © Course Demonstrator, O&A’ Level Accounting, LEVELS ACCOUNTING. ELAR Give the limitations of break even analysis Although, break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be considered: All costs resolved into fixed or variable. Variable costs fluctuate in direct proportion to volume. Fixed costs remain constant over the volume range. The selling price per unit is constant over the entire volume range. The company sells only one product, or mix of products tends to remain constant. Volumetric increase is the only factor affecting costs. The efficiency in the use of resources will remain constant over the period. Scanned with CamScanner