* What is the role provided by break-even point and how would you calculate this point? * Please calculate break-even point in patient days under the provided contract. * What are the limitations of using break-even point and how would you incorporate this point with management strategic planning?
Break- even analysis is a generally neglected credit risk assessment to ol. It is very useful in leaping proposal the business risk profile.
Break-even is the point at which a business makes neither a profit nor a loss, as the total costs are exactly equal to sales revenue. Break-even is a useful tool in exploring the serviceability of debt by looking at the margin of safety, in a particular business profile. The concept is that
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So, the benefits exceed the costs and the variance should be investigated. However, the motive for investigating variances is not just to reduce costs.
What is the difference between favorable and unfavorable variances and how do you calculate them?
A favorable variance is when costs are below expectations (or revenues are above expectations). An unfavorable variance is when costs are higher than expected (or revenues are lower than expected). You calculate variances by taking actual costs and subtracting expected/budget.
What if $1,000 difference is unfavorable and should that be investigated?
What if $1,000 difference is favorable and should that be investigated?
Now, the question about whether a favorable or unfavorable variances should be investigated is another matter altogether. Managers that only think unfavorable variances should be investigated are trying to reduce costs and so costs that are too high are a problem. And, of course, they are! Finding out why a cost was higher than expected helps you figure out how to keep it from happening again. But favorable variances have opportunities and risks too. So, they should be studied as well.
Here are two reasons you need to investigate favorable variances. First, reducing a favorable variance would cost you money! But, researching a favorable variance has a different motive. You are not trying to reduce the variance. You
are more uncertain than the others? How could uncertainty be worked into the analysis? Is
In order to calculate the breakeven point, we use the following equation and budget data:
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
Determine the unit break-even point, assuming fixed costs are $60,000 per period, variable costs are $16.00 per unit, and the sales price is $25.00 per unit.
They compare this actual spending to their budgeted amounts for all line items, and variances are calculated. Variances are the differences between the what was budget and what was actually spent.
The company had a budget of $5,247,250, with the flexible budget being $5,117,385, however the final numbers were $5,096,847, which gives the company an unfavorable variance of -$130,065. Total Variable Cost however was a favorable expense. With a planned budget of $3,967,962 and a flexible budget of $3,869,612 the actual output was $3,805,400 the favorable variance came out to $98,349. Contribution margin was also an unfavorable variance (-$31,716).
However with advantages come disadvantages. For example, with correlational studies there is no background information obtained. Therefore, the reliability of the correlational studies is questioned.
The coefficient of variation (CV) is a standardized measure of dispersion about the expected value; it shows the amount of risk per unit of return.
Although, break-even is very helpful for a company to see where they are and how much improvement they can make, the company can never say that it is 100% correct as change in costs or selling price can affect this analysis greatly. Also, in the short-run break-even analysis can show an accurate figure where as in a long run, it will be a lot more difficult. So, break-even analysis is not that accurate.
This question gives students an opportunity to exercise their ability to interpret break-even analyses. Key teaching points should include explaining the preparation of a break-even chart, the interpretation of the break-even volume (938,799 hectoliters [HL]), and the comparison of the break-even volume to the current volume (1,173,000 HL). Another key point is that the chart in case Exhibit 5 is relevant only for the current cost structure of the company—if variable costs increase or the plant expansion is approved, the break-even volume will rise. Finally, students should be aided in understanding that “break-even” refers to operating profit, not free cash flow. The typical use of the break-even chart ignores taxes, investments, and the depreciation tax shield.
Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)
A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the
Break Even Point in Sales = (Total Fixed Costs + Target Profit) ÷ Contribution Margin Ratio