Question

How would you perform a break-even analysis on the cost of your undergraduate degree? What factors would you include in your calculations? When would you expect to break even?

Answer 1

What is a Break Even Analysis?

The Break Even Analysis (BEA) is a useful tool to study the relation between fixed costs and variable costs and revenue. It’s inextricably linked to the Break Even Point (BEP), which indicates at what moment an investment will start generating a positive return. It can be graphically represented or calculated with a simple mathematical calculation. A Break-Even Analysis calculates the size of the production at a certain (selling) price that is necessary to cover all the costs that have been incurred.

The following list seeks to highlight some of the more practical applications of break-even analysis:

1. What happens to overall profitability when a new product is introduced?

2. What level of sales is needed to cover all costs and earn, say, Rs. 1, 00,000 profit or a 12% rate of return?

3. What happens to revenues and costs if the price of one of a company’s products is changed?

4. What happens to overall profitability if a com­pany purchases new capital equipment or in­curs higher or lower fixed or variable costs?

5. Between two alternative investments, which one offers the greater margin of profit (safety)?

6. What are the revenue and cost implications of changing the process of production?

7.Should one make, buy, or lease capital equip­ment?

Break Even Analysis advantages-

The main advantage of a Break-Even Point is that it explains the relationship between costs, production volume and revenue. This analysis can be expanded to show how the changes between fixed and changing cost relations will affect profit levels and the Break-Even Point in for instance product prices or turnovers. The Break Even Analysis is particularly useful when it is combined with partial budgeting techniques. The most important advantage to using the method is that it shows the minimally required amount of economic activity, necessary to prevent potential losses. Furthermore, based on the Break-Even Point formula, it’s easy to make additional calculations that provide insight into the profitability of the investment.