Break even Analysis
Break even analysis is an important part in production management and decision making. In this assignment, the key elements of the break-even analysis will be discussed. The key elements of break-even analysis are fixed cost, variable cost, total revenue, break-even point and margin of safety. Although break-even analysis is very useful, it has disadvantages.
Break-even analysis is based on the production cost of the company which includes the fixed cost and variable cost. Then the total cost of the production is compared with the total sales revenue to find out the breakeven point. The break even analysis is useful to determine how much sales does the company need to make in order to break even. (Holland, 1998) It is broadly used in management and forecasting in sales. A manager might use break-even analysis to determine the break-even point to make decision on setting the price of the product. The break-even analysis also provides information on the profitable of the products. The company will decide whether they still need to sell products that generate low profit.
Fixed cost is cost that will remain the same no matter the change in level of output. Generally, fixed costs are fixed over the level of output. Examples of fixed costs are rent, depreciation, and administration cost. But there are situation where fixed cost will change. For example, the rent of a tuition centre is £500 at the beginning of the business. After a few months, the number of students of the tuition centre had increase in which they need to rent more rooms for their business. This caused the rent to increase to £700. From this situation, we know that fixed cost is a period cost. It will remain the same for a short term but not for the long run of the business. (Walker, 1997: 116)
Variable cost is cost that will change with the change of output. The variable cost varies directly to the level of output. The higher the level of output, the higher the variable cost and vice
Break-even analysis is based on the production cost of the company which includes the fixed cost and variable cost. Then the total cost of the production is compared with the total sales revenue to find out the breakeven point. The break even analysis is useful to determine how much sales does the company need to make in order to break even. (Holland, 1998) It is broadly used in management and forecasting in sales. A manager might use break-even analysis to determine the break-even point to make decision on setting the price of the product. The break-even analysis also provides information on the profitable of the products. The company will decide whether they still need to sell products that generate low profit.
Fixed cost is cost that will remain the same no matter the change in level of output. Generally, fixed costs are fixed over the level of output. Examples of fixed costs are rent, depreciation, and administration cost. But there are situation where fixed cost will change. For example, the rent of a tuition centre is £500 at the beginning of the business. After a few months, the number of students of the tuition centre had increase in which they need to rent more rooms for their business. This caused the rent to increase to £700. From this situation, we know that fixed cost is a period cost. It will remain the same for a short term but not for the long run of the business. (Walker, 1997: 116)
Variable cost is cost that will change with the change of output. The variable cost varies directly to the level of output. The higher the level of output, the higher the variable cost and vice