Break-Even Analysis
Break-even analysis is that part of Cost-Volume-Profit Analysis which tells us about the level of sales at which revenues equals expenses thus showing a zero net income more precisely, such a sales point is called Break-Even Point. CVP analysis is sometimes referred to simply as break-even analysis. This is unfortunate because break-even analysis is just one part of the entire CVP analysis. Yet, it is always taken as an important part of profit planning as it gives the planner many insights into the data with which he or she is working. Profit planning of each firm begins with break-even analysis.
Example: Suppose, annual fixed costs of Rexona company are $ 100,000, selling price is $ 25 per unit, variable costs per unit is $ 15, contribution margin per unit(CMPU) is $ 10 and contribution margin ratio(C/M) is 40%. Calculate the Rexona,s break-even point(BEP) in units and in $.
Solution,
Rexona,s Break-even Point(BEP)
1. BEP(in units) = Fixed Costs/CMPU = $ 100,000/$ 10 = 10,000 units
2. BEP(in $) = Fixed Costs/C/M ratio = $100,000/0.40 = $ 250,000
Break-Even Ratio
Break-even ratio is the percentage of Break-even sales volume to sales volume at budgeted capacity. For example, if Break-even sales volume is 50,000 units and sales volume at budgeted capacity is 125,000 units, then break even ration is 40% if the company's plant capacity is 200,000 units, then break-even sales to capacity is 25% i.e, 50,000 units/200,000 units X 100.