Breaking Point

Topics: Costs, Variable cost, Cost Pages: 4 (1050 words) Published: January 9, 2012
* What is the role provided by break-even point and how would you calculate this point? * Please calculate break-even point in patient days under the provided contract. * What are the limitations of using break-even point and how would you incorporate this point with management strategic planning? Break- even analysis is a generally neglected credit risk assessment to ol. It is very useful in leaping proposal the business risk profile. Break-even is the point at which a business makes neither a profit nor a loss, as the total costs are exactly equal to sales revenue.  Break-even is a useful tool in exploring the serviceability of debt by looking at the margin of safety, in a particular business profile.  The concept is that certain business costs will be volume orientated, i.e. that they will increase with activity.  Certain other business costs will tend to remain fixed or at least almost fixed. Formula:-

Breakeven point is the volume of sales or production where there is neither profit nor loss. Thus, we can say that: Contribution = Fixed cost
Now, breakeven point can be easily calculated with the help of fundamental marginal cost equation, P/V ratio or contribution per unit. Using P/V Ratio
Sales S BEP =| Contribution at BEP| =| Fixed cost|
| P/ V ratio| | P/ V ratio|
Using Contribution per unit
Breakeven point =| Fixed cost| = 100 units or \$. 1000|
| Contribution per unit| |
Limitations:-
* It is only an aid and can be seen as too simplistic
* The model assumes that all output is sold and on stocks are held - this is not the case in the real world of business * Break-even analysis is based on a static model - in business conditions change daily both internal and external * The effectiveness of break-even analysis depends on the quality and accuracy of the data used to construct the charts It assumes that the costs and revenue are linear - we know that in business that they are not - think of economies of...

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