Question

Discuss break-even point; what it is and what three methods are used to determine it

Answer 1

Break even point is thepoint at which company will earn no profit or no loss.

When introducing the new product company determines the cost associated with it.

every product has Fixed cost and variable cost associated with it

As per Break even analysis we compute Contribution Margin is the difference between sales price and variable cost

Then BEP in Units = Fixed Cost/ Contribution per unit

This helps in determining no of units company needs to sold in order to be profitable

Thus manager estimates the sales it can made

If it exceeds BEP then it will manufacture the product.

Three methods used to determine break even point are:

1) Contribution analysis: It refers to the analysis of incremental or additional revenue and costs of a business. Contribution is the difference between total revenue and variable costs.

2)Algebraic method: It helps in decision making problems of the organization. We know that profit is equal to difference between total revenue and total cost.

3)Graphical method: It shows a linear break-even analysis. When price of a product remains the same, the organization expands its production, thus, total revenue is linear to the output.