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ANALYSIS
By;
Kawal Nain Singh
DEFINITION
The break even point is the
point where the gains equal
the losses. The point defines
when an investment will
generate a positive return.
The point where sales or
revenues equal expenses.
The point where total costs
equal total revenues. There is
no profit made or loss
incurred at the break even
point. It is the lower limit of
profit when prices are set and
margins are determined.
DEFINITION
VARIABLE COST-
They are directly related to the volume of sales: that is these cost
increase in proportion to the increase in sales and vice versa.
FIXED COST -
Fixed costs continue regardless of how much you can sell or not sell,
and can be made up of such expenses as rent, wages, telephone account and
insurance. These cost can be estimated by using last years figure as a basis,
because they typically do not change.
Fixed Cost:
The sum of all costs required to produce the first unit of a
product. This amount does not vary as production
increases or decreases, until new capital expenditures are
needed.
Variable Unit Cost:
Costs that vary directly with the production of one
additional unit.
Expected Unit Sales:
Number of units of the product projected to be sold over a
specific period of time.
Unit Price:
The amount of money charged to the customer for each
unit of a product or service.
DEFINATIONS CONT
Total Variable Cost:
The product of expected unit sales and variable unit cost.
(Expected Unit Sales * Variable Unit Cost )
Total Cost:
The sum of the fixed cost and total variable cost for any given
level of production.
(Fixed Cost + Total Variable Cost )
Total Revenue:
The product of expected unit sales and unit price.
(Expected Unit Sales * Unit Price )
Profit (or Loss):
The monetary gain (or loss) resulting from revenues after
subtracting all associated costs. (Total Revenue - Total Costs)
DEPENDENCE
Break even analysis depends on the following variables:
The fixed production costs for a product.
The variable production costs for a product.
The product's unit price.
The product's expected unit sales [sometimes called projected
sales.]
On the surface, break-even analysis is a tool to calculate at which
sales volume the variable and fixed costs of producing your
product will be recovered. Another way to look at it is that the
break-even point is the point at which your product stops costing
you money to produce and sell, and starts to generate a profit for
your company.
It can also use break even analysis to solve managerial problems.
ADVANTAGE