Question

Give a detailed example of a managers need for break even analysis?

please advise

Answer 1

The Break Even Analysis (BEA) is a useful tool to study the relation between fixed costs and variable costs and revenue.

It’s inextricably linked to the Break Even Point(BEP), which indicates at what moment an investment will start generating a positive return.

It can be graphically represented or calculated with a simple mathematical calculation. A Break-Even Analysis calculates the size of the production at a certain (selling) price that is necessary to cover all the costs that have been incurred.

To understand how this analysis works, it’s wise to at least mention the following cost concepts.

Fixed costs

Fixed costs are also called overhead. These costs are always occur after the decision to start an economic activity and they relate directly to the level of production, but not the quantity of production.

Fixed costs include (but are not limited to) depreciation of materials, interest costs, taxes and general overhead costs (labour costs, energy costs, depreciation costs).

A carpentry business that mainly makes tables, chairs and closets, employs 50 people. The business has a large number of fixed costs. It’s about costs that come back every month and stay the same, and can only change after a year. Think for instance of salaries, monthly energy bills and the depreciation costs of current assets (including machines) and fixed assets (such as a building).

Variable costs

Variable costs are costs that change in direct relation to the volume of production. This concerns for instance selling costs, production costs, fuel and other costs that are directly related to the production of goods or an investment in capital.

For a carpentry business, mainly the costs for raw materials, auxiliary materials, semi-finished goods such as wood, nails and copper handles, are variable. If they are producing 50 closets per month, they use less than when they produce 75 closets in some other month. Therefore, these costs vary every month.