Question

what is break evenanalysis? how is it used by managers? explain

Answer 1

Break even analysis determines the points at which there will be no profit and no loss situation. Break even analysis is all about understanding the relation between revenue, variable cost and fixed expenses.

In this analysis generally it is assumed that sales revenue and variable cost increases when the number of units sold is increase and fixed expenses are constant irrespective of number of items sold. Each sold unit generate some contribution i.e. Sales price less variable cost per unit.

So breakeven point is the point where fixed cost is covered by contribution. BEP = Fixed Expenses / Contribution per unit.

So it is the point where total contribution earned equals to fixed expenses which means there is no loss or no profit.

How it is used by management - It is used by management todecide whether a business is profitable or not. Management decide at what activity level they will achieve no loss situation. If it is near to maximum capacity then it is almost impossible to achieve break even and business roposal should be rejected. Hence management uses it for decision making.