Breakeven point is a point at which output sold produces revenue which is equivalent to total cost meaning that at that point the profit is zero. The company will be interested in the breakeven point in order to avoid operating losses. Therefore the breakeven point is determined using the following formula: Breakeven point = fixed cost Contribution margin per unit Contribution per unit = selling price per unit – valuable cost per unit Contribution is the difference between sales value and the marginal cost of sales. It gives to arise of break even point which can be described as at the point in which the business makes no lose or profit.
It is claimed that contribution is more relevant to management in supply than are costs prepared with a loading for fixed expense. It is pointed out that the loading must, of necessity, vary with the level of output considered. This implies that when trade is bad and output small an attempt to recover all fixed overhead will result in an uncompetitive price. It is accordingly claimed that in practice many opportunities exists of obtaining a contract at a price which makes at least some contribution to fixed expenses, and that therefore a contract so obtained will result in a greater overall net profit than if the contract were not obtained.
There are of course dangers in these view and these are dealt with later. Subject to the dangers, there is little doubt that the approach is of value to businessmen, as it deals with the common business situation of a manufacturer desiring to maximize his profits in the knowledge : (a) that he has an inescapable burden of fixed overheads, and (b) that he can attract or repel an order according to the price he quotes. Break even point calculations shows quantity of output sold at which total revenues equal total costs – that is, the quantity of output sold at which the operating income is zero.
The breakeven point tells them how much output they must sell to avoid a loss. In this after the increase the in the variable cost the breakeven increases from 4476 to 6267 units. The company will need to change sales through aggressive marketing to ensure there is increase in the units sold. At same time they will be required to change the price of the products as in the following case
Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting Drury C; (2000); Management and cost Accounting;5th edition ,business press Thomson Learning,
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