Question

• Consider the concept of break even analysis and target income.
  • In order to apply break even analysis, why would the expenses reported in external financial reports need to be reorganized into categories based on cost behavior?
  • How do these analytical tools relate to product pricing and cost management (i.e., why would this analysis be useful to management)?

Answer 1

Break-even analysis requires calculating and investigating the difference in safety for an occasion based on the combined earnings and associated costs. Break-even analysis is used to analyze the different price levels associated with different levels of demand, to determine what level of sales is needed for a company's fixed costs.

The manager will be more interested in learning the sales level needed to achieve the targeted profit. To solve this problem it is important to treat the target income as a fixed income increase. In other words, the margin must be a fixed cost and the desired profit must be broad.

Break-even analysis is extremely useful in combining the level of your business product or targeted sales. The study is for management purposes only, as metrics and calculations are not important for external sources such as investors and financial institutions. Such an analysis appears to rely on a break-even point (BEP) calculation. The break-even point is calculated by calculating the total fixed cost of the product in the business through variables with a lower cost according to the value of each unit product.

Break-even analysis finds a fixed level of cost compared to the profit produced and sold by the additional unit. In general, the sales of a low-cost company may have a low break-even point. The concept of break-even analysis relates to the extent of product contribution. The contribution margin ratio is higher than the selling price of the product and the total variable prices.