Question

Break-even analysis is more than just calculating a number - it is a decision making tool. What does this statement mean? Make sure your response includes the three different types and methods for determining break-even.

Answer 1

ANS- The statement means that break even helps one to know the financial condition of a business so that a business may make good decisions. Break-even analysis is a point in which there is no profit and no loss. It shows financial status of a company. In an ongoing business it is important to know the break even point so that the relationship between fixed costs, variable costs and revenues can be improved and a right decision can be made for a healthy business.

The three different types of break even are given below-

• The profit and loss break even
• Cash break even
• Income break even

The methods for determining break even are as follows-

• Break even point based on units- The formula for determining break even under this method is Fixed cost/Revenue per unit- Variable cost per unit
• Break even point based on sales dollars- Under this method the formula for calculating break even is Fixed cost/contribution margin and contribution is calculated by price of product-variable cost.