Break Even Analysis

 Break Even Analysis.

- Usefulness of Break Even Analysis:

Such analysis allows the firm to determine at what level of operations it will break even (earn zero profit) and to explore the relationship between volume, costs, and profits. It helps the management that at current costs of products how many number of units must be sold to at least recover the cost of producing the product. For Example: if you spend $200 on producing a product and selling price is $20 then you must sale 10 units to at least recover the cost of product. It also helps the management to determine how much of units to be sold to get desired profit on product. For example: if in the above example you want to earn $20 profit then add it to it's cost of $200 and it will become $220 now you need to earn profit of this $20 you need to sale 11 items of product.

 22# Assumptions of Break Even Analysis:

 •It assumes that everything produced is sold whereas it is often the case that not all output will be sold.

 •It assumes that all of the output is sold at the same price - often a business will have to lower its price in order to increase its sales.

 23# Discus its implication.

 - Margin of Safety:

The margin of safety is the excess of budgeted (or actual) sales over the break-even volume sales. It states the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even. The formula for its calculation is:

 Margin of Safety=Total budgeted (or actual) sales – Break-even sales.

 The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar terms by total sales:

 Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales.

 - Implication: A company can fix his production target calculating margin of safety. To avoid stock out position by calculating margin of safety helps company what will be production target and it also helps to prevent loss.