Cvp Analysis / Break Even Analysis
CVP ANALYSIS / BREAK EVEN ANALYSIS
Break-Even Analysis
Introduction
Break-Even Analysis-Volume-Analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in Sales Revenue, Express and Net Profit. As a model of these relationships, Break-Even Analysis simpifies the real-world conditions which a firm will face.
The objective of Break-Even Analysis is to establish what will happen to the financial results if a specified level of activity or volume fluctuates. This information is vital to management, as one of the most important variables influencing total sales revenue, total costs and profits is output or volume.
Break-Even Analysis is based on the relationship between sales revenue, costs and profit in the short run. The short run being a period in which the output of the firm is restricted to that available from current operating capacity. In the short run, some inputs can be increased but others cannot. For example, additional supplies of materials and unskilled labour may be obtained at short notice, but it takes time to expand the capacity of the Plant and Machinery. Thus output is limited in the short run because Plant facilities cannot be expanded. It also takes time to reduce capacity, and therefore, in the short run, a firm must operate on a relative constant stock of production resources.
Break-Even Analysis Assumptions
It is essential that anyone preparing or interpreting Break-Even Analysis information is aware of the underlying assumptions on which the information has been prepared. The main assumptions are:
a. All other variables remain constant.
b. A single product or constant sales mix.
c. Profits are calculated on a variable-costing basis.
d. Total costs and total revenue are linear functions of output.
e. The analysis applies to the relevant range only.
f. Costs can be accurately divided into their fixed and variable
Break-Even Analysis
Introduction
Break-Even Analysis-Volume-Analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in Sales Revenue, Express and Net Profit. As a model of these relationships, Break-Even Analysis simpifies the real-world conditions which a firm will face.
The objective of Break-Even Analysis is to establish what will happen to the financial results if a specified level of activity or volume fluctuates. This information is vital to management, as one of the most important variables influencing total sales revenue, total costs and profits is output or volume.
Break-Even Analysis is based on the relationship between sales revenue, costs and profit in the short run. The short run being a period in which the output of the firm is restricted to that available from current operating capacity. In the short run, some inputs can be increased but others cannot. For example, additional supplies of materials and unskilled labour may be obtained at short notice, but it takes time to expand the capacity of the Plant and Machinery. Thus output is limited in the short run because Plant facilities cannot be expanded. It also takes time to reduce capacity, and therefore, in the short run, a firm must operate on a relative constant stock of production resources.
Break-Even Analysis Assumptions
It is essential that anyone preparing or interpreting Break-Even Analysis information is aware of the underlying assumptions on which the information has been prepared. The main assumptions are:
a. All other variables remain constant.
b. A single product or constant sales mix.
c. Profits are calculated on a variable-costing basis.
d. Total costs and total revenue are linear functions of output.
e. The analysis applies to the relevant range only.
f. Costs can be accurately divided into their fixed and variable