Question

why is the level of sales so important when a company considers their break down even analysis and their net profit?

Answer 1

Break-even sales volume refers to sales volume, in dollars or in units, required to reach no-profit or no-loss situation. It means that break-even sales volume is the sales volume at which firm's total cost will be equal to its total costs, including variable costs and fixed costs. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. As a result, variable costs per unit remain constant at all levels of sales or production but total cost varies in equal amount. Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. As a result, fixed costs in total remain constant at all levels of sales or production but per unit cost varies. Net profit refers to excess revenue generated by the firm during reporting period over and above total costs for the respective reporting period. At breakeven point, net profit will be zero because total revenue will be equal to total costs for the period. Contribution margin refers to difference between sales dollars and variable costs. It is the portion of sales after variable costs available to absorb firm's fixed costs for the period. At break-even point, contribution margin will be equal to fixed costs so that net profit will be zero. As sales volume helps to generate sufficient contribution margin in the break-even analysis, level of sales is so important when a company considers their break down even analysis and their net profit.