Summery on Break Even Analysis

Summary

1. Fixed and variable cost classification helps in CVP analysis. Marginal cost is also useful for such analysis.

3. Breakeven chart is the graphical representation of cost structure of business.

4. Profit/Volume (P/V) ratio shows the relationship between contribution and value/volume of sales. It is usually expressed as terms of percentage and is a valuable tool for the profitability of business.

5. Margin of safety is the difference between sales or units of production and breakeven point. The size of margin of safety is an extremely valuable guide to the financial strength of a business.

Questions

1. Discuss the concept of fixed and variable cost.

2. CVP analysis is a useful technique for managerial decision-making. Discuss.

3. CVP analysis has no limitation. Discuss.

4. What is a breakeven chart?

5. What questions can a breakeven chart answer to?

6. Provide a formula to determine the breakeven point of a single product, multi-product and different divisions and subdivisions of an organization.

7. What are the disadvantages of using breakeven analysis?

8. Define contribution margin.

9. Explain-- Margin of safety shows the financial strength of a business. 

Quick quiz

1. What is the formula for calculating the breakeven point in terms of the number of units required to break even?

2. Give the formula which uses the C/S ratio to calculate the breakeven point.

3. What is the margin of safety?

4. What do the axes of a breakeven chart represent?

5. Give three uses of breakeven charts.

6. What is a profit/volume chart?

7. What does the horizontal axis of the PN chart represent?

8. What are the limitations of breakeven charts and CVP analysis?

Answers to quick quiz

1. Breakeven point (units) = Total fixed costs/Contribution per unit

2. Sales value at breakeven point = .Total Fixed Cost divide by C/S ratio

3. The margin of safety is the difference in units between the budgeted sales volume and the breakeven sales volume.

4. The vertical axis represents money (costs and revenue) and the horizontal axis represents the level of activity (production and sales).

5. Breakeven charts are used as follows.

o To plan the production of a company’s products

o To market a company’s products

o To given a visual display of breakeven arithmetic

6. The profit/volume chart is a variation of the breakeven chart which provides a simple illustration of the relationship of costs and profit to sales.

7. ‘V on the horizontal axis is volume or value of sales.

8.

o A breakeven chart can only apply to a single product or a single mix of a group of products.

o A breakeven chart may be time-consuming to prepare.

o It assumes fixed costs are constant at all levels of output.

o It assumes that variable costs are the same per unit at all levels of output.

o It assumes that sales prices are constant at all levels of output.

o It assumes production and sales are the same (stock levels are ignored).

o It ignores the uncertainty in the estimates of fixed costs and variable cost per unit.