BREAK EVEN POINT ANALYSIS - Accounts and Finance for Managers

This meaning of the analysis is explained through three different components viz.

BREAK EVEN POINT ANALYSIS

Break Even Point is the point at which the Total Cost is equivalent to Total Revenue. At the break even point the business neither earns profit nor incurs a loss. It means that the firm's cost is recovered at the minimum level of production.

BREAK EVEN POINT ANALYSIS

If Sales > BEP Sales ¾® earn profit i.e. Total Sales> Total Cost which leads to earn profit.
If Sales< BEP Sales ¾® incur loss i.e. Total Sales< Total Cost which registers incurrence of loss.

This Break even point analysis can be interpreted into two classifications. The first classification is narrow sense of BEP, which mainly emphasizes on BE Point.
The second segment is the broader sense which elucidates the role of BEP towards managerial decisions

  • Fixation of Selling price
  • Acceptance of Special / Foreign order
  • Incremental Analysis- On cost as well as revenue
  • Make or Buy Decision
  • Key factor analysis
  • Selection of production mix
  • Maintaining the specified level of profit and so on

The enlisted decisions will be discussed immediately after the preliminary aspects of marginal costing i.e. Break even analysis.

The Break even point in accordance with narrow sense can be classified into two categories

  • Break Even Point in Units
  • Break Even Point in Sales

Break Even Point in Units

Illustration 1:

Assume the selling price of product Rs.20/-per unit and variable cost per unit Rs.10/- and the fixed cost Rs.1000/- Find out the break even point.
Sales Rs.20/-
Variable Cost Rs.10/-
Contribution Rs 10/-
Fixed Cost Rs.1000/-
Profit (-) Rs. 990/-

If the firm produces only one unit, the amount of loss is Rs.990/-. To avoid the amount of loss how many units are to be produced ?

As already highlighted, BEP is the point at which the firm neither earns profit nor incurs loss. Profit/Loss is a resultant out of Contribution while meeting out the fixed cost volume of the transaction. From the above example, the contribution per unit is Rs.10/ not sufficient to meet out the fixed cost volume of Rs.1000/-. The purpose of finding out the BEP in units is to identify the level of contribution which is not only equivalent as well as to meet fixed cost of the transaction but also to avoid loss. To raise the volume of contribution at par with the fixed cost volume, fixed cost has to be related to the contribution margin per unit through the ratio given below

Fixed cost= "X" units x Contribution Margin Per Unit

units can be found out from the following

units=Fixed Cost / Contribution Margin Per Unit

The total number of units "X" which equate the contribution volume of "X" units with the total fixed cost is the Break Even Point (Units).

Break Even Point (Units)= Fixed Cost / Contribution Margin Per Unit= Rs.1000 / Rs.10= 100units


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