At BEP, Sales – Variable cost = Fixed costs. OR Contribution = Fixed costs.
Break-even analysis is an analytical technique that is used to determine the probable profit at any level of production. It is basically an extension of marginal costing.
Advantages of Break-even analysis
1. Profit planning
2. Product planning
3. Activity Planning
4. Lease Decisions
5. Make or buy decisions
6. Capital profit decisions
7. Distribution channel decisions
8. Price decisions
9. Choosing Promotion Mix
10. Decision regarding profitability of products or department. Some basic assumptions of break even analysis are:-
1. All costs are classified into fixed and variable costs.
2. The sales mix always remains constant.
3. There is no change in the general price level.
4. The sole influencing variable on costs and revenues is the volume,
5. The revenue and costs are linear.
6. Company’s stocks are valued at the marginal cost.
7. The units produced and the units sold are the same.
The break even point-the point, at which an organization’s revenues and expenses are equal, is termed as the break even point. For example, when at a particular amount of sales, the organization incurs no profit or loss, it normally breaks even.
Applications of break even analysis:-
The break even point is considered to be one of the simplest methods which are used for analytical tools in management. The break even analysis gives a dynamic view of the relationship between cost, profit and sales. By studying the beak even sales graph, the managers can know when to...