Break Even Analysis

Break even analysis, also known as cost-volume-profit-analysis, is considered with finding the point at which revenues and costs and exactly equal. This point, known as break-even point, represents the volume of output at which neither profit is made nor a loss is incurred. Therefore production/sale must not be allowed to fall beyond this point. This analysis can be carried out either algebraically or graphically.

Assumptions in Break-even Analysis

(a) It assumes that costs can be classified into fixed and variable costs, ignoring semi-variable costs.

(b) Sale price is assumed as constant.

(c) It assumes no improvement in efficiency.

(d) Changes in input prices are also not considered.

(e) It considers that production is equal to the sales.


Advantages of Using Break-even Analysis

(i) It helps in deciding profitable level of output, below which losses will occur.

(ii) It can help in deciding the target.

(iii) It helps in deciding as to which product should be manufactured and which should not.

(iv) It helps in taking plant expansion decision.

(v) It helps in taking equipment replacement decision.

(vi) It foretells likely profits or losses at various levels of output.

(vii) It can indicate margin of safety.

Break Even Analysis Chart

In order to obtain a clear position of the business, it is important to construct "Break Even Chart". It indicates the points at which neither profit nor loss is made. This point at which neither profit nor loss is made is known as Break Even Point (B.E.P). The point where the total lines cut the sales line is the Break-Even Point. At this point the company's earnings are just sufficient to cover the expenses.

This chart can be demonstrated by the following example:

Break Even Analysis

Also See: Calculating Break Even Point , Application of Break Even Analysis , Break Even Point Theory

Next Chapters

Estimating Procedure
Difference between Estimating & Costing
Depreciation & Obsolescence
Material Cost Calculation
Calculating Labor Cost
Direct and Indirect Expenses
Component Cost
Machine Shop Estimating
Forging and Forging Types
Starting an Organization
Welding Cost Estimation
Jigs and Fixtures
Qualities of an Entrepreneur
Starting Small Scale Industries
Budget and Budgetary Control
Supply & Law of Supply
Exchange and Barter Exchange
Classification of Market
Money and Types of Money
Trade Cycle
Break Even Analysis
Financial Management

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