What is break-even analysis?
Analysis to establish that the point, by which the income received equals the costs tied together with obtaining the income. Break-even analysis predicts what is known as the margin of safety, amount which the income exceeds break-even point. It is an amount that the income can fall while still staying above the break-even point. What is break-even point?
The break-even point is, a point, by which increases equal losses in general. The break-even point determines when investment causes the positive return. Point where sales or the identical income costs. Or also point where costs total equal the production for total revenues. There is no profit done or the loss. It is important for everybody who is running a business, from now on the break-even point is a lower limit of the profit when prices are set and margins are determined. The advantages and disadvantages of using break-even analysis. The break-even analysis enables the business organization in order to: 1. To predict the effect of price changes of the sale.
2. for analysis connection between the fixed cost and the variable cost. 3. To predict the effect on profitability if changes in the cost and productivities. Although the break even has these virtues or applications, there are also a few defects from the break even analysis. Defects in the break even analysis
1. supposes selling prices are fixed at all levels of productivity. 2. Supposes the production and sales are the same.
3. Break-even graphs can be a time consuming to prepare.
4. It can but applies to one product or one connecting products. Formula for break-even point;
Selling price (per unit) – Variable cost (per unit)
What is margin of safety?
The margin of safety is a tool to help management understand how far sales could change before the company would have a net loss. It is computed by subtracting break-even sales from budgeted or forecasted sales. This is an example of break-even graph. On the graph on...
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