Question

1) What is breakeven? What is its purpose? What are the two types of breakeven? How is breakeven useful in conducting profit analyses? How is the formula sheet useful in helping you conduct a profit analysis?

Answer 1

Break even is a economic concept in which total cost and total revenue are equal and firm is in a position of no gain or loss. Break even point in useful to know at what level or point your company would be profitable and it is also used to price the product and to know the relationship between cost voloume and profit. Break even can be divided into two parts (1) break even point in units which tells us that in what quantity units should be sold to generate the enough revenue to recover the total cost. (2) Break even point in dollars which tells us that what value of sales the company must generate to recover the total cost. Another classification of break even levels can be like accounting break even point which tells the level of sales required to recover the total cost. Financial break even point is the level of revenue where all the cost including the financial charges are recovered and cash break even point.

Break even point is useful in conducting profit analysis. it is also called cost volume profit analyses. It analyses the relation between the variables like variable cost, total fixed cost, selling price on the profitability of the company and measures the impact of any change in the above mentioned variables. It is used to fix the level of price of the product, level of safety margin and number of budgeted units of production to achieve the desired level of profit.

Break even point in Units- total fixed cost/contribution margin per unit

Break even point in sales- total fixed cost/contribution margin ratio

Formula sheet is helpful to determine and estimate the break even level of sales and units under different situations with different degree of independent variables like sales units, selling price per unit, variable cost per unit and any change in total fixed cost.