Question

The variable in even break analysisare?

Answer 1

Break even is a level of output where cash inflow = cash outflow and firm is able to mange its both fixed as well as variable cost.

At this level firm has ZERO profit. If production and sales grow above this level firm will make profit and vice versa.

Break even unit can be computed using below formulas-

a) Fixed cost / Contribution per unit OR

b) Fixed cost/ (sale price per unit - Variable cost per unit)

Main variable in break even analysis are -

a) Sales price : Sale price will generate cash flow for the firm. Sales price should be higher than variable cost else there will never be break even level.

b) Variable cost : Is the cost which varies Proportionately with the level of output - example are direct material, direct labor sales commission etc..

d) fixed cost : is the cost which remain unaffected from level of sales or production. Inspite of out put this cost is fixed. Example of fixed cost are fixed rent for gowdon or office premises.

There may exist a component of semi variable cost, which is fixed at a given level of output but increases as production/output increases. This semi-variable cost also affect break even analysis.