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Break Even Analysis

The document discusses break-even analysis, also known as cost-volume-profit (CVP) analysis. It defines key terms like fixed costs, variable costs, break-even point, and contribution margin. The objectives of CVP analysis are to forecast profits under different volumes, set flexible budgets, evaluate performance, formulate pricing strategies, and determine overhead cost allocation. CVP analysis can be used to forecast the effects of changes in volume, set sales targets, determine cash needs, and evaluate product profitability. Key assumptions are that costs can be separated into fixed and variable components and that volume is the only factor impacting costs and revenues.

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KIMBERLY MUKAMBA
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86 views

Break Even Analysis

The document discusses break-even analysis, also known as cost-volume-profit (CVP) analysis. It defines key terms like fixed costs, variable costs, break-even point, and contribution margin. The objectives of CVP analysis are to forecast profits under different volumes, set flexible budgets, evaluate performance, formulate pricing strategies, and determine overhead cost allocation. CVP analysis can be used to forecast the effects of changes in volume, set sales targets, determine cash needs, and evaluate product profitability. Key assumptions are that costs can be separated into fixed and variable components and that volume is the only factor impacting costs and revenues.

Uploaded by

KIMBERLY MUKAMBA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Break Even Analysis

• A fundamental of accounting is that all revenues and costs


must be accounted for and the difference between the
revenues and costs is the profit, or loss, of the business.
• Costs can be classified as either a fixed cost or a variable cost.
• A fixed cost is one that is independent of the level of sales;
rather, it is related to the passage of time.
• Examples of fixed costs include rent, salaries and insurance.
• A variable cost is one that is directly related to the level of
sales, such as cost of goods sold and commissions.
• This categorisation of costs into “variable” and “fixed”
elements and their relationship with sales and profits has
been developed as “break-even analysis”.
• This break even analysis is also known as Cost–volume–
profit (CVP) analysis.
• The break-even point in any business is that point at which
the volume of sales or revenues exactly equals total
expenses or the point at which there is neither a profit nor
loss under varying levels of activity.
• The break-even point tells the manager what level of
output or activity is required before the firm can make a
profit
• The cost-volume-profit (CVP) analysis helps management
in finding out the relationship of costs and revenues to
profit. The aim of an undertaking is to earn profit.
• Profit depends upon a large number of factors, the most
important of which are the cost of manufacture and the
volume of sales effected.
• Both these factors are interdependent-volume of sales
depends upon the volume production, which in turn is
related to costs.
OBJECTIVES OF B.E.P/C-V-P Analysis
• The objectives of cost-volume profit analysis are given
below:
(1) In order to forecast profit accurately, it is essential to
know the relationship between profits and costs on the
one hand and volume on the other.

(2) Cost-volume-profit analysis is useful in setting up flexible


budgets which indicate costs at various levels of activity.
(3) Cost-volume-profit analysis is of assistance in
performance evaluation for the purposes of control.
• For reviewing profits achieved and cost incurred the effects on costs of
changes in volume are required to be evaluated.
4. Pricing plays an important part in stabilizing and fixing up
volume.
• Analysis of cost-volume-profit relationship may assist in
formulating price policies to suit particular circumstances
by projecting the effect which different price structures
have on costs and profits.
(5) As predetermined overhead rates are related to a selected
volume of production, study of cost –volume relationship is
necessary in order to know the amount of overhead costs
which could be charged to product costs at various level of
operation.
USES OF C-V-P Analysis
• C.V.P. analysis helps in forecasting costs and profits as a
result of change in volume.
• It helps fixing a sales volume level to earn or cover a given
revenue, return on capital employed, or rate of dividend.
• It assists determination of effect of change in volume due
to plant expansion or acceptance of an order, with or
without increase in costs or in other words a quantum of
profit to be obtained can be determined with change in
volume of sales.
• C.V.P. analysis helps in determining relative profitability
of each product, line, project or profit plan.
• Through cost volume-profit analysis inter-firm comparison
of profitability can be done intelligently.
• It helps in determining cash requirements at a desired
volume of output, with the help of cash breakeven charts.
• Break-even analysis emphasises the importance of capacity
utilisation for achieving economy.
Assumptions Behind C-V-P Analysis
• All costs can be resolved into fixed and variable element
• Fixed costs will remain constant and variable costs vary
proportionately with activity
• The only factor affecting costs and revenues is Volume
• Inventories are valued at variable cost only
C-V-P By Formula
• A. Break even point (in units) = Fixed costs/ Contribution per unit

• Break even point (in sales) = (Fixed costs/Contribution per unit)


*SP/unit

CS ratio = (Contribution/unit)/ Selling price/unit *100

Level of Sales to result in target profit(in units) = Fixed costs + Target P


Contribution/unit
• Level of Sales to result in Target profit ($ Sales)
=Fixed cost +Target profit *Selling price/unit
Contribution per unit
C-V-P Analysis

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