What Is Break Even Analysis?
“The study of cost-volume-profit relationship is frequently referred to as break-even analysis. The term is used in two senses. In its narrow sense, it refers to a technique of determining that level of operations where total revenue equals total expenses i.e. the point of no profit no loss. ”
These days a great deal of weight is given to cost-volume-profit relationship. An attempt is made to study the wide-ranging effect of the different levels of activities upon whole revenue and total cost with the help of revenue output function and cost volume function respectively.This technique measures profits corresponding to the different levels of output. The study of cost-volume-profit relationship is frequently referred to as break-even analysis.
The term is used in two senses. In its narrow sense, it refers to a technique of determining that level of operations where total revenue equals total expenses i.e. the point of no profit no loss.
The break-even analysis is based on the assumption that all elements of cost i.e. production, administration, selling and distribution can be segregated into fixed and variable components.
Variable cost remains constant per unit of out put and thus fluctuates directly in proportion to changes in the volume of output. Fixed cost remains constant at all volumes of output. Volume of production is the only factor that influences cost. There is harmonization between cost production and sales.
Break-even point is a level of production at which revenue and cost are the same. At this point there is neither profit nor loss. Every concern tries to reach this level of manufacture at the earliest and profit starts only when production increases ahead of this level.
Break-even analysis is the distinction between sales and variable cost or marginal cost of sales. It may also be defined as the surplus of selling price over variable cost per unit.
Contribution is the sum that is contributed towards unchanging expenses and profit. It establishes the correlation between contribution and sales and is of central importance for studying the effectiveness of operations of a business. It tells the consequence on profit or changes in the volume.
The concept of profit/volume relationship is useful to compute the break-even point. It also helps in calculating the profit at a given volume of sale, the sales volume required to bring in a given profit and the volume of sales necessary to maintain the current profits if the selling price is reduced.
Author - DeeKay
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