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3.3 Break-Even Analysis (Methods of Calculations (Formula (fixed…
3.3 Break-Even Analysis
Methods of Calculations
Graphical
Formula
fixed cost/contribution per unit
Table of cost and revenues
Margin of safety
How much sales could fall without suffering a loss
If there is a negative sign, it means the company is in danger
Calculating target break-even revenue
Evaluation on Break-Even analysis
Advantages
Charts easy to construct
Provides useful guidelines to management on break even points
Easy comparisons can be made
The equation provides a precise break even results
Assist manager to when taking important decisions
Limitations
Not always produce a straight line.
No allowance made for stock levels
Not all cost can be classified into fixed and direct cost
Cost and price data are often estimated
Unlikely for fixed cost to remain the same
Calculations on output to achieve the target revenue
(Fixed cost + Target profit)/ contributions per unit
Calculating target price