Accounting and Financial Management

Accounting and Financial Management

Question 1

Breakeven Analysis

It is the point where the income received is equal to total costs associated with the sale of a product (TR = TC). An equilibrium point is commonly used in businesses or organizations to determine the potential profitability of selling a certain product. To calculate the breakeven point, it is necessary to have clearly identified the behavior of costs, otherwise it is extremely difficult to determine the location of this point.

Sean IT total revenues, total costs TC, the unit price P, Q the number of units produced and sold, CF fixed costs, variable costs and CV. Then:

If the product can be sold in greater quantities to those from the equilibrium point will then receive company benefits. If, however, lies below the equilibrium point, will losses. A breakeven analysis shows that in markets or occupation the total revenue equals total costs. Or if no gain or loss. Especially on new products and projects is important to know in advance. The purpose of a break-even analysis is when there is even played. When the actual sales or occupancy is higher than the break-even, profit is made, if it ss lower, then a loss is made.

For break-even analysis, total cost should first be calculated.

The total costs are divided into:

•total cost constant (TCK)

•total variable costs (TVK)

The calculation becomes: TCK = TK + TVK

The total costs remain constant if not always right. However, the total variable cost is proportional to the sales of the company. This would mean that more customers for example, 10% leads to a 10% increase overall cost variable. The variable costs are therefore a fixed amount per customer or sales. The total variable costs are equal to the variable cost per customer multiplied by the number of customers.

The calculation is as follows:

v = variable costs per customer

q = number of clients

TVK = vxq

The calculation for the total cost becomes:

TK = TCK + (vxq)

The total income

The calculation of total income becomes: TO = TCO + TVO

After all the constant costs are recouped this funding contribution is no longer needed to cover the costs constant. The contribution margin will be pure profit for the company.

When looking at the selling price of the product P is called and the variable cost per unit of product V, the contribution margin is (P - V). C stands for the total amount of constant costs of the company.

The number of products that must be sold to reach break-even point is calculated as follows:

Break-even sales = C / (P - V)

The break-even sales are at the breakeven sales associated turnover of the company,

Break-even sales = breakeven sales price of each product x

When the selling price of a product eg € 60, the variable cost € 40 per product, and the constant cost per period amount to € 1,000,000, the break-even sales and breakeven sales fairly easily determined.

Break-even sales: 1,000,000 / (60 - 40) = ...