Advantages of Break-Even Analysis By Sreebalanath M V PDF

Preview

Summary

Download Advantages of Break-Even Analysis By Sreebalanath M V PDF

Description

Advantages of Break – Even Analysis by Sreebalanath M V Break- Even Analysis Break-even analysis refers to ‘ascertainment of level of operations where total revenue equals to total costs’. It is an analysis used to determine the probable profit or loss at any level of operations. Break-even analysis is a method of studying the relationship among sales revenue, variable cost and fixed cost to determine the level of operation at which all the costs are equal to its sales revenue and it is the no profit no loss situation. This is an important technique used in profit planning and managerial decision making. Break-even analysis is made through graphical charts. Break-even chart indicates approximate profit or loss at different levels of sales volume within a limited range. The break-even charts show fixed and variable costs and sales revenue so that profit or loss at any given level of production or sales can be ascertained. Breakeven analysis is used to locate the sales volume at which a business earns exactly no money, where all Contribution margin earned is needed to pay for the company’s fixed costs. Contribution margin is the margin that results when all variable expenses are subtracted from revenue. In essence, once the contribution margin on each sale cumulatively matches the total amount of fixed costs incurred for a period, the breakeven point has been reached. All sales above that level directly contribute to profits. Breakeven analysis is useful for the following reasons:  Determining the amount of remaining capacity after the breakeven point is reached, which reveals the maximum amount of profit that can be generated.  Determining the impact on profit if automation (a fixed cost) replaces labor (a variable cost).  Determining the change in profits if product prices are altered.  Determining the amount of losses that could be sustained if the business suffers a sales downturn.

 BREAK – EVEN CHART

Advantages of Break – Even Analysis by Sreebalanath M V

ADVANTAGES OF BREAK - EVEN ANALYSIS 1. Make or buy decision: The analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy. 2. Production planning: The analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs. 3. Cost control:

Advantages of Break – Even Analysis by Sreebalanath M V As a cost control device, the analysis can be used to detect insidious upward creep of costs that might otherwise go unnoticed. 4. Financial structure: Break-even analysis provides an understanding of the behavior of profits in relation to output. This understanding is significant in planning the financial structure of a company. 5. Conditions of uncertainty: When some reasonable basis for subjective extrapolation is available, the breakeven analysis provides the financial management with information helpful in its decision-making activities....