09-07-2012, 02:55 PM
BREAK EVEN POINT and ANALYSIS
BREAK EVEN POINT .ppt (Size: 216 KB / Downloads: 30)
DEFINITION
The break even point is the point where the gains equal the losses. The point defines when an investment will generate a positive return. The point where sales or revenues equal expenses. The point where total costs equal total revenues. There is no profit made or loss incurred at the break even point. It is the lower limit of profit when prices are set and margins are determined.
At break even point, the desired profit is zero. In case the volume of output or sales is to be computed for a desired profit, the amount of desired profit should be added to fixed cost is the formula given above.
CASH BREAK EVEN POINT
It is the point where cash breaks even i.e. the volume of sales where cash realization on account of sales will be sufficient to meet the immediate cash liabilities.
The label of activities where the total costs under two alternatives are same
While calculating this point cash fixed costs (i.e. excluding fixed share of depreciation and deferred expenses) and cash contribution (i.e. after making adjustments for variable share of depreciation etc.) are considered.
BREAK EVEN ANALYSIS
It refers to the ascertainment of level of operations where total revenue equals to total costs.
Analytical tool to determine probable level of operation.
Method of studying the relationship among sales, revenue, variable cost, fixed cost to determine the level of operation at which all the costs are equal to the sales revenue and there is no profit and no loss situation.
Important techniques is profit planning and managerial decision making.
ADVANTAGE
It is cheap to carry out and it can show the profits/losses at varying levels of output.
It provides a simple picture of a business - a new business will often have to present a break-even analysis to its bank in order to get a loan.
LIMITATIONS
Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)
It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).
In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).