ITFT - Break even analysis
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This document discusses break-even analysis, which is used to determine the minimum level of production or sales needed to cover total costs. It assumes costs can be classified as fixed or variable, and that sale price and variable costs remain constant. Break-even analysis is helpful for deciding minimum sales quantities, tender prices, and effects on profitability. However, it has limitations in that it only considers costs and assumes fixed costs and average variable costs remain constant.
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ITFT - Break even analysis
- 5. Characteristics of Break-Even Point The losses cease to occur while profits have not yet begun. It suggests the BEP level (profit or loss). It indicates the minimum level of production/sales.
- 9. Basic Assumptions It assumes that cost can be classified into fixed and variable costs. Sale price of the product is constant. It assumes constant rate of increase in variable cost. No improvement in technology and labor efficiency. Changes in input prices. The production and sales are synchronized.
- 17. Uses of Break-Even Point Helpful in deciding the minimum quantity of sales Helpful in the determination of tender price Helpful in examining effects upon organization’s profitability Helpful in deciding about the substitution of new plants Helpful in sales price and quantity Helpful in determining marginal cost
- 18. Advantages of Break-Even Analysis Explains the relationship between cost, production, volume and returns. Shows the effect of profit levels. Useful when used with partial budgeting. It helps to prevent losses.
- 19. Limitations of Break-Even Analysis It is only a supply side (i.e. costs only). Fixed costs (FC) are constant. Average variable costs are constant per unit of output. The quantity of goods produced = quantity of goods sold. Profit are the function of output alone.