Utility of break even point in managerial decision making, Cost Accounting

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UTILITY OF BREAK EVEN POINT IN MANAGERIAL DECISION MAKING

1. It assists in determination of sales mix

2. It assists in exploring new markets

3. It assists in deciding about discontinuance of a product line

4. It assists in taking make or buy decisions

5. It assists in taking equipment replacement decisions

6. It helps in investment of assets

7.It  helps in decision making relating to change Vs status quo - which may consist of situations such as -

i)  adoption of new method of operation

ii)  over- time Vs second shift or

iii)  Sale Vs further processing etc

8. It assists in making decisions as to expand or contract

9. It assists in decisions relating to shut down or continue operating

Break even chart:  The break even chart is a graphical means of finding out the breakeven point.  It is a graph with output or sales on the X -axis and costs (fixed, variable and total) plotted on the Y - axis.  At which point the total sales line intercepts the total cost line from below is known as breakeven point. At this point, total cost is similar to total revenue. Further than this point lies the profit zone and below this point lies the loss zone.

Illustrations

1.  From the following particulars, calculate the break even point

Variable cost per unit = Rs.12

Fixed expenses = Rs.60,000

Selling price per unit = Rs.18

Solution:

BEP (Units) =             Fixed cost

                         Contribution per unit

(Selling Price - Variable Cost = Contribution)

Rs.18 - Rs.12 = 6)


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