Question

• What is break-even?
• How is break-even calculated?
• How is a break-even analysis used?
• What are the risks if break-even is not analyzed carefully?

Answer 1

Ans)

Break even is a technique used to study cost, volume and profit relationship. It is that level of operations where there is neither profit nor loss.

Break even calculation:

Break even point (units) = Fixed costs/Contribution margin per unit.

Break even point (dollars) = (Fixed costs/Contribution margin per unit) * Selling price per unit.

Break even analysis can be used only on few assumptions:

- Costs and production are directly proportional.

- Unit selling price should remain constant at all levels of sales.

- Total costs should be easily divided into variable cost and fixed cost.

- There is no beginning inventory and ending inventory.

- Product mix should remain constant etc.

Risks of break even analysis:

- This analysis is based on unrealistic assumptions.

- Fixed costs may vary with different production levels.

- There will be beginning and ending inventory.

- It is only useful for single product or single mix.

If any doubts or queries please comment and clarify I'll explain asap.