Break-Even Analysis

Managers must know how different cost sway as the volume of sales expands or contracts. The study of the interrelationships of sales, costs and bring in income is called cost-volume-profit analysis. It is a key factor in many planning decisions. The affectionateness of cost-volume profit analysis is gaining an understanding of how costs and profits change in response to changes in volume. This study is a great deal called break-even- elevation analysis. This is a mistake because break-even- bode, the point of zero net income is just a part of the cost-volume-profit concept and is often only incidental to the planning decision at hand.However, it is often the offset point of the analysis and provides insights into the possible dangers of received courses of action (Peralta, J. l979). The following land site willing be utilise as a basis for tidings and to demonstrate the techniques of and the need for cost-volume-profit analysis. We shall assume that any cost may be classif ied as either stiff or variable. improve costs atomic number 18 costs, which remain constant in total, within the current period, c beless(predicate) of changes in the level or volume of activity.Variable costs are those, which are expected to fluctuate, in total, in proportion to sales, production or new(prenominal) measures of activity. The O-BUSH Company operates a organize stand at the Osama Memorial stadium selling hotdog sandwiches during juicy days. The company is now in the bring of negotiating for a lease of a sandwich stand at the Al Qaeda Coliseum during NBA games. The company has determined that the following costs and prices will probably characterize the new stand Selling price per sandwich $2. 00 cytosine% Variable expenses per sandwichHotdog $ 0. 75 Sandwich cultivated cabbage . 30 Mustard/catsup . 05 Commission to the coliseum . 10 1. 20 60% Contribution Margin . 80 40% Fixed Expenses per game day Rental of stand $500 Wages for 8 employees at $37. 50 300 Other fixed expense 200Total $1,000 Should the company make it into a lease agreement with Al Qaeda? O-BUSH will aim to answer certain questions before a decision can be made. Break-Even Point Computation Question What would be the break-even-point of the company in impairment of numbers of units (sandwiches) sold and dollar of sales? At break-even point, revenue is barely equal to costs, no profits are realized, and no losses are incurred. For the purpose of this illustration, the unit function approach is used.The approach is based on the fact that every unit sold generates or provides a certain amount of contribution brim that goes toward the covering of the fixed costs. The contribution margin is the excess of sales price over the variable expenses pertaining to the unit in question Unit sales price $2. 00 Unit variable expenses 1. 20 Unit contribution margin to fixed Expenses and net profit $ . 80 To find the number of units must be sold to break-even, total fixed cost mu st be divided by unit contribution margin.Thus, $1,000 divided by $0. 80 is 1,250 sandwiches. If only the percentage relationship in the midst of variable expenses and sales is known, the formula can still be used to compute the break-even point in dollar sales. Sales price 100% Variable expenses 60% Contribution margin 40% Total Fixed Cost divided by contribution margin ratio equals break-even point in dollar sales. Thus, $1,000 divided by 40% is $2,500. The company must sell more than 1,250 sandwiches in order to have a profit. role Peralta, J. (l979). Management Accounting, An Introduction. GIC Enterprises & Co. , Inc. Manila