Introduction
Break-even analysis is always been used by production management and management accountants to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. This technique based on categorising production cost between variable cost and fixed cost.
Assumption
The break-even analysis is depending on these several assumptions:
All costs are classified as variable and fixed cost. Variable cost is cost that will change when the output of production change. There are two types of variable …show more content…
Furthermore, the safety margin is refers to the extent to which the firm can afford a decline before it starts incurring losses. To determine the sales safety margin, the formula is (sales – BEP) / sales x 100.
For example, sales are 300 units while the BEP is 150 units so the safety margin is (300-150) / 300 x 100 = 50%. Its mean that the business that selling 300 units of the product can afford to decline sales up to 50%. Thus, if the firm are incurring any losses, the safety margin may be negative as well. In that case, the percentage tells the extent of sales that should be increased in order to reach the point where there will be no loss.
Target Profit:
The break-even analysis can be used for the purpose to calculate the volume of sales so the management can know if they are already achieving a target profit. If the company have a target profit, they will find out the extent of increase in sales based in this analysis. The formula to calculate target sales volume is fixed cost plus with target profit then divided by contribution margin per …show more content…
Management should consider about their profit before they make a decision on this problem. If they reduce the prices, it will lead to a reduction in contribution margin. The volume of sales must be increased if they want to maintain the previous level of profit. Given a reduction in price, the formula to determine a new volume of sales to maintain the same profit, the total profit divided by new selling price then minus with average
Break-even analysis is always been used by production management and management accountants to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. This technique based on categorising production cost between variable cost and fixed cost.
Assumption
The break-even analysis is depending on these several assumptions:
All costs are classified as variable and fixed cost. Variable cost is cost that will change when the output of production change. There are two types of variable …show more content…
Furthermore, the safety margin is refers to the extent to which the firm can afford a decline before it starts incurring losses. To determine the sales safety margin, the formula is (sales – BEP) / sales x 100.
For example, sales are 300 units while the BEP is 150 units so the safety margin is (300-150) / 300 x 100 = 50%. Its mean that the business that selling 300 units of the product can afford to decline sales up to 50%. Thus, if the firm are incurring any losses, the safety margin may be negative as well. In that case, the percentage tells the extent of sales that should be increased in order to reach the point where there will be no loss.
Target Profit:
The break-even analysis can be used for the purpose to calculate the volume of sales so the management can know if they are already achieving a target profit. If the company have a target profit, they will find out the extent of increase in sales based in this analysis. The formula to calculate target sales volume is fixed cost plus with target profit then divided by contribution margin per …show more content…
Management should consider about their profit before they make a decision on this problem. If they reduce the prices, it will lead to a reduction in contribution margin. The volume of sales must be increased if they want to maintain the previous level of profit. Given a reduction in price, the formula to determine a new volume of sales to maintain the same profit, the total profit divided by new selling price then minus with average