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Cost-Volume-Profit Analysis, Advantages of Break-even Analysis,…
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The break-even point is the number of units that need to be sold, or the amount of sales revenue that has to be generated, in order to cover the costs required to make the product.
A CVP analysis used to determine the sales volume required to achieve a specified profit level. Therefore, the analysis reveals the break-even point where the sales volume yields a net operating income of zero and the sales cutoff amount that generates the first dollar of profit.
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The contribution margin is defined as
Sales – Variable Costs.
Therefore, Contribution margin ($) = (units sold × price per unit) – (units sold × cost per unit)
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The cost-volume-profit (CVP) analysis helps management in finding out the relationship of costs and revenues to profit
The contribution margin percentage indicates the portion each dollar of sales generates to pay for fixed expenses (in our example, each dollar of sales generates $.40 that is available to cover the fixed costs).
Break even analysis examines the relationship between the total revenue, total costs and total profits of the firm at various levels of output.
Break even analysis is a method, as
said by Dominick Salnatore, of revenue and total cost functions of the firm.
According to Martz, Curry
and Frank, a break-even analysis indicates at what level cost and revenue are in equilibrium.
Break-even point is that volume
of sales where the firm breaks even i.e., the total costs equal total revenue.
It is, therefore, a point where
losses cease to occur while profits have not yet begun. That is, it is the point of zero profit.
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