CVP ANALYSIS / BREAK EVEN ANALYSIS
Break-Even Analysis
Introduction
Break-Even Analysis-Volume-Analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in Sales Revenue, Express and Net Profit. As a model of these relationships, Break-Even Analysis simpifies the real-world conditions which a firm will face.
The objective of Break-Even Analysis is to establish what will happen to the financial results if a specified level of activity or volume fluctuates. This information is vital to management, as one of the most important variables influencing total sales revenue, total costs and profits is output or volume.
Break-Even Analysis is based on the relationship between
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A break-even chart is like a photograph; it reveals the position at a particular moment. Inflation and management decisions can meet that the chart is soon out of date.
A Mathematical Approach to Break-Even Analysis
We can develop a mathematical formula from the following relationship:
Net profit = (Units sold x Unit selling price) - [(Units sold x Unit variable cost) costs] + Total fixed
The following can be used to represent the various items in the previous equation:
NP = Net Profit X = Unit Sold C = Unit Selling Price B = Unit Variable Cost A = Total Fixed Cost
The equation can now be expressed in mathematical terms:
NP = Cx – (A + Bx)
Example
Fixed Costs per annum $60,000 Unit selling Price $20 Unit Variable Cost $10 Existing sales 8,000 units Relevant range of output 4,000 – 12,000 units
Using the data above, we can now answer the following questions:
1. What is the output at which the company breaks even (i.e. makes neither a profit nor a loss)?
2. How many units must be sold to obtain $30,000 profits?
3. What is the profit which will result from a 10%
This analysis will evaluate the breakeven point for Competition Bikes Inc. Sales units and sales dollars will be identified for the breakeven point. These sales units and dollars will be broken down between CarbonLite and Titanium bikes.
To consider this I will be looking at the Income Statement. If the company’s revenue exceeds its expenses it will report net income or will report a net loss. This will report on the success or failure of the company’s operation by reporting its revenue and expenses.
According to Investopedia the breakeven point is the point at which gains equal losses. For Competition Bikes, Inc. achieving the breakeven point is a leap in the right direction. This will allow them to be one step closer to being a profitable business. Here we will analyze the sales units and the sales dollars of the Titanium and CarbonLite bike models in order to configure the breakeven point.
Actual sales = 1686 (in million €) and Break even sales = 1126.61(in million €)
The break-even analysis which indicates a considerable positive difference between the figures required to reach the break-even point for the South Delaware Coors Wholesale Distributorship and the figures possible based on the predicted percentage of market shares for Coors Inc. nationally.
Major organisation like: Tesco they might consider using the breakeven analysis because they are the biggest around the UK and they have big competition like Sainsbury’s so they need to know about their turnover for the financial years.
The president of Cold Moo Ice Cream Company, a chain of ice cream stores in the Midwest, was unhappy with the actual six-month profit figures for the company recently prepared by the CFO. The president asked the CFO for a profit breakdown, by store, of the actual six-month results. When the president received the report, he was extremely upset and called the CFO into his office. The president stated, "These reports show that each store in the chain is profitable, but our company results are unprofitable! How can this be?" The CFO pointed out that each store was allowed to set prices for ice cream based on its cost structure. However, the stores' cost structures did not include headquarters costs or the costs of advertising and delivery of products.
Break even analysis is reliable as it is made from the budget and it gives a financial structure to the business. The data used for break-even, the business try to make the data as accurate as possible. They make this data depending on the previous year’s financial report. That’s why break-even is reliable to estimate current year’s results. In a short run, break-even analysis can be accurate.
The internal sales data showed that the business would need $45,000 in monthly revenue to break even. The sales forecast which have been prepared keep in mind a 65% gross margin, however, based on actual figure for 2009, this target has not been reached, and the forecasted sales have fallen.
According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include:
Hope this email finds you well. Please find attached the margin analysis that we have done. We tried to capture the effect in variations in volume, price and costs from the MTBP numbers. It would be great if we can have a call next week so we can walk you through the numbers and the rationale behind each of them.
A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.
4. Calculate each of the three product’s break-even points using the data in Exhibit 3. Why is the sum of these three volumes not equal to the 1,100,000 units aggregate break-even volume?
Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)
So in order to find the source of the profit and money an 80/20 analysis shall be implemented by varies categories of business, such as by product, by customer, by competitive segment and any other split that is related to the business. Firstly, any business usually have all the information and statistics of products. Thus, by going through each of the sales through a certain period and then decide which is the best according the profitability. However, the information seek might not be ready and organized which in this case you are going to build them and organize them which will increase the difficulty of the task and the effort, so after categorizing each product with its overhead cost the result will reveal that some products resemble themselves as so profitable, while most of the products are marginally profitable or modestly, and some tends to be the sources to the losses in the