Break-even Analysis

Break-Even Analysis

Break-even analysis is a very useful cost accounting technique. It helps you determine how many product units your company needs to sell to recover its costs and start realizing profit.

Break-Even analysis :- Break-Even analysis establishes the relationship among the factors affecting profit. It is a simple method of presenting to management the effect of changes in volume on profit.

Terms used in Break-Even Analysid:-

1.)  Fixed cost

2.)  Variable Cost

3.)  Mixed Cost

 

  Fixed cost:-

fixed cost
fixed cost

The cost which do not change for a given period, with change in volume of production e.g. rent, taxes, insurance etc.

 

Fixed cost does not mean they never change. They are constant upto a specific volume or range of volume.

Fixed costs are any costs that don’t depend on the volume of production. Rent, insurance, property taxes, loan payments and utilities would be examples of fixed costs, because you will pay the same amount for them no matter how many units you produce or sell. Categorize all your firm’s fixed costs for a given period and add them together.

 

 

variable cost
variable cost

Variable Cost:-

These cost vary directly with output volume.

 

These cost vary directly with output volume.

 

Variable costs are those that will fluctuate along with production volume. For example, a business that performs oil changes will have to purchase more oil filters if they perform more oil changes, so the cost of buying oil filters is a variable cost. In fact, because the company can expect to buy 1 oil filter per oil change, this cost can be allocated to each oil change performed.

 

 

 

 

mixed cost
mixed cost

Mixed Cost:-

 

This Cost is a combination of semi-variable and semi-fixed cost.

 

 

 

 

Assumptions in Break-Even Analysis:-

  • Selling price will remain constant.
  • Linear relationship between sales volume and cost.
  • Production and sales quantity are equal.
  • No other factor, except quantity, will affect the cost.

Break Even  Analysis:-

Let us assume

F  = Fixed cost

v  = variable cost per unit

s  =sales price per unit

P  = profit

Q  = quantity produced and sold

Q*  = Break-even quantity ( no loss, no profit point)

Break-even Analysis
Break-even Analysis

 

 

 

 

 

 

 

 

 

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