Question

  Principles of Cost Accounting de E. J. Vanderbeck

P10-8: “Break-even analysis”

Answer 1

Break-even analysis:-

Here is the analysis in qutioner form to understand break-even:-

What is breakeven point analysis?

In accounting terminology, this is called the "contribution margin." It is the amount the sale of each unit contributes to the ultimate profitability of a corporation. When enough such chunks of contribution have been produced to equal fixed costs, the business has reached its break-even point.

What is the break even point for a business?

To be profitable in business, it is important to know what your break-even point is. Your break-even point is the point at which total revenue equals total costs or expenses. At this point there is no profit or loss - in other words, you 'break even'.

What does break even analysis mean?

The break-even point determines the amount of sales needed to achieve a net income of zero. It shows the point when a company's revenue equals total fixed costs plus variable costs, and its fixed costs equal the contribution margin.

Is break even analysis useful?

Break-even analysis, one of the most popular business tools, is used by companies to determine the level of profitability. It provides companies with targets to cover costs and make a profit. It is a comprehensive guide to help set targets in terms of units or revenue.

What is the purpose of the break even analysis?

The main purpose of break-even analysis is to determine the minimum output that must be exceeded for a business to profit. It also is a rough indicator of the earnings impact of a marketing activity.

What are the limitations of break even analysis?

Limitations. Breakeven analysis is a useful tool for working out the minimum sales needed to avoid losses. However, it has its limitations. It makes assumptions about various factors - for example that all units are sold, that forecasts are reliable and the external environment is stable.

How do you calculate the breakeven point?

Break-even Point In Sales Dollars. One can determine the break-even point in sales dollars (instead of units) by dividing the company's total fixed expenses by the contribution margin ratio. The ratio can be calculated using company totals or per unit amounts.

How do you work out the breakeven point?

Calculating in costs/revenue. Learn this equation: For the breakeven point in costs/revenue, you then multiply the breakeven point in units, which you have just calculated, by the sales price. If you look at the breakeven chart, you will see this is the correct answer.

How do you find the breakeven point?

First, let's take a look at how many cakes Ethan has to sell:

1. Break-Even Point in Units = Fixed Costs / (Sales Price Per Unit - Variable Costs Per Unit)
2. Break-Even Point in Units = $16,000 / ($20 - $8.88)
3. Break-Even Point in Units = $16,000 / $11.12.
4. Break-Even Point in Units = 1,439 (rounded up)

What is the breakeven point?

The breakeven point is the sales volume at which a business earns exactly no money. The breakeven point is useful in the following situations: To determine the amount of remaining capacity after the breakeven point is reached, which tells you the maximum amount of profit that can be generated

What is a break even analysis example?

The basic idea behind doing a break-even analysis is to calculate the point at which revenues begin to exceed costs. ... Examples of fixed cost include rent, insurance premiums or loan payments. Variable costs are costs that change with the quantity of output. They are are zero when production is zero.

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