Break even analysis

 A break even analysis is a financial technique which helps a organization to determine the stage at which the organization should produce the product or service to earn profit.

In other words we can say that it is a financial calculation for determining the number of product or service a organization should produce to maintain no profit or no loss zone.

It also shows the relationship between the variable cost, fix cost, and revenue.

Components of Break even analysis-

There are many components of berak even analysis. These components are as below-

1.Fixed Cost- It is the first element of Break even analysis.The cost that is defenite and there is no change after increasing or decreasing production this type of cost is called fix cost.

2.Variable cost- It is the second element of Break even analysis. The cost that changes according to increase or decrease production this type of cost is called variable cost.

3.Contribution Margin-It is also an important element of break even analysis. The excess between the selling price and total variable cost is known as contribution margin.

Use of Break even analysis-

There are many uses of Break even analysis. These uses are as below-

1.It helps to determine the minimum level of production.

2.It helps to determine the selling price of product or service to earn profit.

3.It helps to forecast according to increase or decrease the volume of production.

4.It provides a point where we should start production to earn profit.

5.It also helps in Production planning, Profit planning erc.

6.It helps organization in participating Tender and quote price.

7.It helps to launch new product or service in the market.

8.It helps in decision making in the area of Production, Pricing etc.

Limitations-

1.It is based on the assumption that all costs may be classified into two groups but it is not practically to devide all costs into two groups.

2.It assumes that Fixed cost always remain same.There is no change after increasing or decreasing rhe production level but it is not true. After a certain level of production it changes.

3.It assumes that variable cost changes proportionally according to increase or decrease the volume of production but it is not always true that it changes according to direct proportions.

4.It assumes that selling price remains unchanged. It walks straight line that is not true. There are many factors like demand, supply affect price so it does not always walk in the straight line.

5.It assumes that the condition of business always remain same that is not possible.

6.It assumes that Fixed cost, Variable cost and price increase  in linear form that is not true.