Abstract
Break even analysis is a method that has been applied by many business operations in determining the least operational points which they can operate and still remain in business. It is very important for a business that has just entered the market and wants to win its market share before it can set the selling prices for its prices. It is also applicable in events where here are a number of competitors a firm wants to win. Break even point is defined as the point below which a business cannot operate. At this point, the business should be able to cover all its costs, which are fixed and variable costs. It is measured in either product units or dollars.
Bill French, Accountant
The break even analysis is a very important
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With the break even analysis, the firm will easily make a decision on whether to alter the existing products. It is true with the alterations, the sales volume has to increase and if the firm finds that it is not possible to make the extra sales, it will have to stop with the alterations. For instance, it is planned that there is extra investment on the C product which will mean an increase in costs. Since the firm’s capacity is thought to be at the maximum, it will not be possible to make the increased investment.
Break-even analysis is very useful tool in all business operations. Although it has the disadvantages brought about by the assumptions made, it has its own advantages as well. The disadvantages are the assumptions that everything produced is sold and at the same price. However, the advantages which make it useful and each of the firm is advised to use it are that it is cheap and it helps a firm acquire a loan. With its relationship of returns, volume, production and cost shown, the firm will be able to make decisions on whether to take some business ventures or to leave them (Accountingformanagement.com, 2009). With the use of a break even analysis, it is very easy to determine whether a firm is on the best track of doing business without making profits or losses.
References
Accountingformanagement.com. (2009). Break Even Point Analysis-Definition, Explanation Formula and Calculation. Retrieved from
d) Break even sales change that would change the profits by the same amount as a reduction in price.
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
In order to calculate the breakeven point, we use the following equation and budget data:
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
Based on the Excel Problem of chapter one, if the total capacity for this business is 725 will you stay in it? If you want to stay in it what price you need to obtain a break even point of 725?
Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.
There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost
This question gives students an opportunity to exercise their ability to interpret break-even analyses. Key teaching points should include explaining the preparation of a break-even chart, the interpretation of the break-even volume (938,799 hectoliters [HL]), and the comparison of the break-even volume to the current volume (1,173,000 HL). Another key point is that the chart in case Exhibit 5 is relevant only for the current cost structure of the company—if variable costs increase or the plant expansion is approved, the break-even volume will rise. Finally, students should be aided in understanding that “break-even” refers to operating profit, not free cash flow. The typical use of the break-even chart ignores taxes, investments, and the depreciation tax shield.
Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)
Break even analysis can be used to decide whether to alter the existing product emphasis or not. For example in this case, if we refer last year’s data, we can see that the product C is not economically feasible to manufacture at $2.40 / unit. Following table gives the analysis for checking whether the company can afford to invest in additional “C” capacity.
Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs
As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the
Break Even Point in Sales = (Total Fixed Costs + Target Profit) ÷ Contribution Margin Ratio