What is the role provided by break-even point and how would you calcul

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What is the role provided by break-even point and how would you calculate this point?What are the limitations of using break-even point and how would you incorporate this point with management strategic planning
Introduction: 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 certain business costs will be volume orientated, i.e. that they will increase with activity. Certain other business costs will tend to remain fixed or at least almost fixed. Formula:- Breakeven point is the volume of sales or production where there is neither profit nor loss. Thus, we can say that: Contribution = Fixed cost Now, breakeven point can be easily calculated with the help of fundamental marginal cost equation, P/V ratio or contribution per unit. Using P/V Ratio Sales S BEP = Contribution at BEP = Fixed cost P/ V ratio P/ V ratio Using Contribution per unit Breakeven point = Fixed cost = 100 units or $. 1000 Contribution per unit Limitations:- It is only an aid and can be seen as too simplistic The model assumes that all output is sold and on stocks are held this is not the case in the real world of business Break-even analysis is based on a static model in business conditions change daily both internal and external The effectiveness of break-even analysis depends on the quality and accuracy of the data used to construct

he charts It assumes that the costs and revenue are linear we know that in business that they are not think of economies of purchasing Although, break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be considered: All costs resolved into fixed or variable Variable costs fluctuate in direct proportion to volume. Fixed costs remain constant over the volume range. The selling price per unit is constant over the entire volume range. The company sells only one product, or mix of products tends to remain constant. Volumetric increase is the only factor affecting costs. The efficiency in the use of resources will remain constant over the period It is only an aid and can be seen as too simplistic The model assumes that all output is sold and on stocks are held this is not the case in the real world of business Break-even analysis is based on a static model in business conditions change daily both internal and external The effectiveness of break-even analysis depends on the quality and accuracy of the data used to construct the charts It assumes that the costs and revenue are linear we know that in business that they are not think of economies of purchasing It has been stated that the break-even point (BEP) is the production volume at which a firm is neither making profit nor loss . Any increase in production from this level results in profit making, while any decrease would result in losses. Industrial enterprises or firms therefore strive to exceed this point so that they can make profit. This point is normally illustrated in cost/revenue (C/R) vs. production level (Q) charts as the position where the total revenue (TR) line intersects the total cost (TC) line (Fig. 1). The production level at the break-even point is represented by Q BE .

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