Managerial Accounting - Essay Example

This article mainly discusses Breakeven Analysis such that the first section highlights the definition of breakeven point along with its graphical representation. Next section describes the importance of breakeven analysis. Last part of this article outlines the implications of breakeven analysis followed by the conclusion which summarize the article. Breakeven Point The level of sales or production quantity which can bring the company in a position where it neither generates any profits nor incur any losses, that point is called as breakeven point or level (tutor2u).

When a particular product is manufactured, it has mainly two components which are variable costs and fixed costs. In order to reach at the breakeven level of sales, variables costs are deducted from the sales to arrive at the contribution margin. The percentage of that contribution margin with respect to sales is then compared with fixed costs resulting in the breakeven level of sales. If the contribution margin is provided in per unit terms, then break even quantity to be sold would be found.

Following are the formulae for Breakeven Sales Level and Breakeven Quantity: Breakeven Sales Level = Fixed Cost / Contribution Margin (%) Breakeven Quantity = Fixed Cost / Contribution Margin (per unit) Where, Contribution Margin = Sales – Variable Cost Graphical Representation Graphically, breakeven points can also be identified with the help of the following diagram, where it can be observed that the point of intersection between lines OA and BC where line OA describes the normal sales level and BC denotes the total cost of the product comprising both variable and fixed costs.

The point Q denotes the breakeven quantity. It is important to note that at point P, the firm is neither incurring any loss nor generating any profit and that is the breakeven point for the sales level. Reasons for Breakeven Analysis There are different reasons due to which business managers are keen to undertake this analysis such that future planning of operating activities, setting sales objectives, avoiding losses, estimating sales and costs forecasts etc. All these reasons are discussed as under: Future Planning Breakeven analysis helps business managers in undergoing rigorous future planning about the different products.

By virtue of this analysis, some products are removed from the product line which can no longer generate profits, some of the products are added in as they have the capacity to generate some profits. At the same time some existing products are also continued with as their breakeven analysis provides them the likelihood of earning some profits. Setting Sales Objectives In order to motivate the sales force, breakeven analysis is conducted and then sales force is provided some targets to achieve.

As per meeting the different levels of target sales, the company’s profits increase at the same time it adds up more rewards to the sales force. Avoiding Losses The next major reason for the breakeven analysis is the avoidance of losses. Since the most preferred objective of a company is to avoid losses at any costs, therefore the business managers, conduct this analysis which reveals as which product can be sold in what quantities in order to establish different quantity levels of sales. If a given product’s breakeven quantity is too high and the company does not realize that this much quantity they can actually sold, it means that product will surly incur some losses. So it is