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Unit II - Break-Even Analysis


Concept of Break-Even Analysis:

Break-Even Analysis is a concept used very widely in production management and cost. It is an analytical tool which helps the firm to identify that level of sale where it will cover its cost of production. Any sale over and above the break- Even Point will accrue profits to the firm, while any sales less than it would put the firm into losses. The Break-Even Point shows the price at which the firm makes neither profit nor loss. Break-Even point is a very significant concept in Economics and business, especially in Cost Accounting. Break-Even point is a point where the cost of production and the revenue from sales are exactly equal to each other; which means that the firm has neither made profits nor has incurred any losses. The Break-Even Analysis is also known as the Cost- Volume- Profit Analysis and is used to study the relationship between total cost, total revenue, profits and losses. It also helps to determine that level of output which is required to cover the operating costs of a business.

Limitations of Break-Even Analysis:

For the break- even point to be counted, all costs need to be clearly categorized in fixed and variable costs, which may not be possible every time.
For the multiple- product or joint- product operations, it is difficult to apply the break-even analysis. on needs to ascertain the costs to each product, hence the analysis is applicable only for a single product.
The computation of the break-even point is based on the historical information. If this information is not relevant, the analysis cannot be applied usefully.

Significance of Break-Even Analysis:

The break-even analysis helps us to determine the levels of sales necessary to meet all the operating costs. With the estimates of revenue and costs, we can forecast the profits. One can also appraise the effects of change in price, fixed costs and variable cost on sales volume, total cost and total revenue and in turn, on the break-even point. One can compare the profit earning capacities of different firms. It can also bring out the significance of capacity utilization for achieving economy.

Video Lecture Links:


https://youtu.be/EMVs0IL0EfU
 

  
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