Application/Necessities of Break even analysis, Write some terms relating to Break even analysis

 Application/Necessities of Break even analysis: The break-even point is one of the simplest yet least used analytical tools in management.

(1) It helps to provide a dynamic view of the relationships between sales, costs and profits.

(2) A better understanding of break-even, for example, is expressing break-even sales as a percentage of actual sales-can give managers a chance to understand when to expect to break even.

(3) The break-even point is a special case of Target Income Sales, where Target Income is 0 (breaking even). This is very important for financial analysis.

 Q. Write some terms relating to Break even analysis.  Ans:

  For understanding the calculation of Break even point, the following terms should be kept at the back of one's mind:

 FC= Fixed Cost

VC=Variable Cost

TC=Total Cost

TR=Total Revenue

TS=Total sales

CM=Contribution Margin

P= Profit

TC=FC+VC

P =TR - TC or TS -TC or S- TC

Contribution Margin (CM)= Selling price per unit - Variable cost per unit.

 Formula-1:

Break even point=Total fixed cost/Unit contribution

Or

Break even point=Fixed cost/ (Selling price per unit - Variable cost per unit).

Formula-2:

Fixed Cost

Total Sales - Variable cost

Total Sales

Or _BEP=       Fixed Cost     

          Contribution Margin ratio

CMR = Contribution Margin ratio

Sales price per unit