Question

How do I paraphrase the following, "Break-even analysis includes the calculation as well as examination of the margin of safety for a firm grounded on the revenues collected and related costs. Analyzing various price levels connected to different levels of demand, a firm utilizes break-even analysis to get what level of sales are required covering total fixed costs. A demand-side analysis will provide a seller much insight concerning selling capabilities. Break-even analysis checks at the level of fixed costs relative to the profit gained by each extra unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale. " ?

Answer 1

Break Even point (BEP) is that level of sales where fixed cost is nil in other words the amount sales required to cover the fixed cost of an enterprise is its BEP.

Following Equation can be made for Calculating BEP -

                              Break Even Point (Units) =

Contribution per unit = Selling price - Variable Cost

Illustration to show the concept - A manufacturing Concern sold 200000 units during 2016-2017, fixed cost incurred 32,00000 $, Variable cost per unit 35 $ and selling price per unit 60 $ let us check its BEP-

                              BEP = 3200000 $ / (60-35 $)

                                     = 128000 Units

Interpretation, company has recovered its fixed cost at 128000 level of sales and remaining 72000 units are its Margin of safety (MOS). Therefore MOS = Sales - BEP

Therefore it is correct to say that break even analysis helps to decide the level of sales required to cover the fixed cost.Suppose in above case Fixed cost is 25,00000 $ then BEP will be -

                                                                      = 25,00000 $ / 25

                                                                     = 100000 Units

A company with lower fixed cost will have a lower break even point of sales as demonstrated above. Break- Even analysis is also performed to know the level of fixed cost corresponding to the profit achieved by each additional unit is not unfavourable.