2. BREAK EVEN ANALYSIS
ďBreak Even Analysis: Study of cost â volume â
profit relationship.
ďTotal revenue = Total cost.
3.
4. FACTORS AFFECTING BREAK EVEN
ďąInternal Factors
⢠Employing extra sales staff
⢠Price increase
⢠Automation replaces direct labor
ďąExternal Factors
⢠Recession cuts demand
⢠Price war forces price cut
⢠Inflation pushes up direct costs.
5. ADVANTAGES OF BREAK EVEN ANALYSIS
ďSimple to conduct and understand.
ď Shows profit and loss at different level of
output.
ď Can cope with changing circumstances.
6. DISADVANTAGES OF BREAK EVEN ANALYSIS
ď Assumes that all output is sold at a given price.
ď Regular changes in circumstances reduces its
usefulness as a forecasting tool.
ď Based on data from which it is drawn. Poor
quality data would lead inaccurate conclusions.
7. COST â VOLUME - PROFIT ANALYSIS
⢠If cost behavior is related to sales income, it
shows cost-volume-profit relationship.
⢠What is the net affect if volume is changed?
8. OBJECTIVE OF CVP ANALYSIS
⢠Essential to ascertain the relationship between
cost, profit and volume.
⢠Helpful in setting up flexible budget.