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Cvp Analysis / Break Even Analysis

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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 …show more content…

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 Inflation and management decisions can meet that the chart is soon out of date.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%

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