Please enable JavaScript.
Coggle requires JavaScript to display documents.
3.3 BREAK-EVEN ANALYSIS (METHODS OF CALCULATING BREAK-EVENS (GRAPHICAL…
3.3 BREAK-EVEN ANALYSIS
BREAK-EVEN
the level of output at which total costs is equal to total revenue
total cost = total revenue
METHODS OF CALCULATING BREAK-EVENS
TABLE OF COSTS & REVENUES METHOD
GRAPHICAL METHOD
Break-even Chart
fixed costs
total costs
sales revenue
Margin of Safety
the amount by which the output level exceeds the break-even level of output
FORMULA METHOD
break-even level of output = fixed costs / contribution per unit
BREAK-EVEN ANALYSIS - FURTHER USES
Assist Managers in making Key Decisions
marketing decision
operation management decision
choosing locations for new factory
Usefulness
charts are easy to construct and interpret
provides useful guidelines to management on ;
break-even points
safety margins
profit/loss levels
comparisons can be made
the equation produces a precise break-even result
can be used to assist managers when making important decisions
Limitations
The assumption that costs and revenues are always represented by straight lines are unrealistic
not all costs can be classified into fixed and direct costs
there is no allowance made for stock levels on the break-even charts
CALCULATING
OUTPUT TO ACHIEVE TARGET PROFIT
PURPOSE ; to calculate what level of sales will be needed to achieve this aim
USED BY ; a business/division that has set a fixed rate of return as an objective
TARGET BREAK-EVEN REVENUES
MEANING ; the amount of revenue needed to cover both fixed and variable costs so that the business breaks even
TARGET PRICE