Cost-Volume-Profit and Break Even Analysis:
Cost-volume-profit analysis helps us to learn the behaviour of cost and profit in response to varying level of business activity. It is also useful for investors and creditors because it determines the ability of business to pay debts and enhance dividend payments. In this unit, you have studied break-even analysis which discovers the point either in monetary term or in terms of number of units, at which total costs equal revenues. The point is called break-even point. Problem related to make or buy decision may be solved through break-even analysis. Crossover charts have been described in this unit which are composed by plotting alternative processes on a single chart.
A number of mathematical formulae and relationships useful in cost-volume-profit and break-even analysis have been discussed in previous sections of this unit. These are summarized below for convenience.
BEP_{x} = Break Even Point in Units = Total Fixed Costs /(Price - Variable Cost)
BEP _{R }= Break Even Point in dollars = Total Fixed Costs / (1 - (Variable Cost/ Selling Price)
BEP_{R} = F / ∑ [( 1 - (V_{I}/ Pi) × (W_{I})
Contribution rate = (Unit sales price - Variable cost per unit) /Unit sales price
Sales volume (in units) = (Fixed costs + Operating income)/Contribution margin in per unit
Sales volume (in rupee) = (Fixed costs + Operating income) / Contribution rate
Operating income = Margin of safety × Contribution rate.