CHAPTER 3

• Break-even analysis - is of vital importance in determining the practical application of cost functions.
• Break-even analysis - It is a function of three factors, i.e., sales volume, cost and profit.
• Break-even analysis - It aims at classifying the dynamic relationship existing between total cost and sale volume of a company.
• Break-even analysis also known as cost-volume-profit analysis
• Break-even analysis - It helps to know the operating condition that exists when a company ‘breaks-even’, that is when sales reach a point equal to all expenses incurred in attaining that level of sales.
• break-even analysis - is a financial tool which helps a company to determine the stage at which the company, or a new service or a product, will be profitable.
• break-even analysis - it is a financial calculation for determining the number of products or services a company should sell or provide to cover its costs (particularly fixed costs).
• Break-even - is a situation where an organisation is neither making money nor losing money, but all the costs have been covered.
• Break-even analysis - is useful in studying the relation between the variable cost, fixed cost and revenue.
• OA - represents the variation of income at varying levels of production activity ("output").
• OB - represents the total fixed costs in the business
• As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase.
• Fixed costs - are those business costs that are not directly related to the level of production or output.
• Fixed costs - even if the business has a zero output or high output, the level of fixed costs will remain broadly the same.
• Examples of fixed costs:

  Rent and rates

  Depreciation

  Research and development

  Marketing costs (non- revenue related)

  Administration costs
• Variable costs - are those costs which vary directly with the level of output.
• Variable costs - They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission.
• A distinction is often made between "Direct" variable costs and "Indirect" variable costs.
• Direct variable costs - are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre.
• Direct variable costs - Raw materials and the wages those working on the production line are good examples.
• Indirect variable costs - cannot be directly attributable to production but they do vary with output.
• Indirect variable costs - These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labour costs.
• Contribution margin - is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold.
• contribution margin ratio - is the difference between a company's sales and variable expenses, expressed as a percentage.
• ratio - expresses the proportion of profit generated on that specific sale.
• break-even point formula is calculated by dividing the total fixed costs of production by the price per unit less the variable costs to produce the product.
• formula for BEPU

  A) fixed cost

  B) sales price-variable cost

  
• Since the price per unit minus the variable costs of product is the definition of the contribution margin per unit, simply rephrase the equation by dividing the fixed costs by the contribution margin

  A) fixed cost

  B) contribution margin

  
• bepu - This computes the total number of units that must be sold in order for the company to generate enough revenues to cover all of its expenses.
• formula for BEPUD

  A) sales price

  B) bepu

  
• bepud - This will provide the total dollar amount in sales needed to achieve in order to have zero loss and zero profit.
• formula for #updp

  A) desired profit

  B) contribution margin

  C) bepu

  
• break-even analysis - is very useful for knowing the overall ability of a business to generate a profit.
• management responsibility to monitor the breakeven point constantly. This monitoring certainly reduces the breakeven point whenever possible.
• total margin - generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit.
• contribution margin - should be relatively high, since it must be sufficient to also cover fixed expenses and administrative overhead.