Methods of Determining Breakeven Point
Added on - 28 May 2020
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Running Head: Methods of Determining Breakeven PointBreakeven Analysis andCost Volume Profit Analysis
Methods of Determining Breakeven Point1Breakeven Analysis and Cost Volume Profit AnalysisEvery business is conducted with the motive of achieving some targets and objectives.Profit maximisation is one of the key objectives of the business in order to survive and growsmoothly. Profit is the important parameter of the overall success of the business. Hence, itmust be pre-determined by any business using various analytical tools and techniques ofmanagement accounting. Few of those tools have been discussed below.Breakeven analysis is the important tool of management accounting that is used todetermine the point of breakeven.Horngren (2009) clears thatthis analysis focuses on therelationship between the sales revenues and total costs of the business. Breakeven point is thelevel of activity which is achieved by any business when its total revenue from sales isexactly equal to its total expenses. It is the point where a firm neither earns any profit nor itincurs any loss from its operating activities. This point is also termed as point of equilibrium.It can be calculated in monetary terms as well as unitary terms. Business managers usebreakeven point as the point of reference above which sales should be achieved to generatethe profits for the firm. As perHansen, Mowen & Guan (2007)the analysis of breakeven isundertaken in two conditions which are discussed below:Linear cost and revenue relationship and the Non-linear cost and revenue relationship. On thebasis of the above mentioned conditions, following are the methods of determining breakevenpoint for businesses and products:Graphical method: Although breakeven point for any products or business can be identifiedusing equations but information can be communicated more effectively using visual formats.The pictorial presentation of the breakeven point helps the managers in understanding the
Methods of Determining Breakeven Point2immediate and clear results. Under graphical method, the relationship between sales revenue,cost and the volume is depicted. This method is used for linear breakeven analysis. Under thismethod price of the product is kept constant and the production of the company is expanded.Therefore, it shows the linearity between the total revenue of the business and its quantum ofoutput.Algebraic Method: It is also known as equation method of calculating the breakeven point ofsales which is represented by an equation that is based on formula for cost volume profit.P(x) = v(x) + FC + ProfitWhere,P= selling price per unit,X= number of units,V= variable cost per unitFC= total fixed cost.At the point of breakeven sales, the profit is zero and therefore the simplified CVP formula isused.Contribution analysis method: Under this method the additional or incremental sales revenueand costs related to it are analysed to determine the point of breakeven sales. Contribution isdetermined by deducting the total variable cost of the business (in case of firm dealing insingle product) from the total revenue from the sale of the given product. This can also bedetermined by the graphical representation under which the line of total cost including boththe fixed and variable cost is parallel to the variable cost. And at breakeven point both thelines of total revenue (which increases with the increase in level of output) and the total costline are intersected by each other.