Break – Even point analysis is a technique used to determine the relationship between an organization’s fixed costs, variable costs, sales volume, and profits. Which we can also call CVP or Cost Volume Profit analysis. For this analysis to be effective we will need a break-even chart.
In this article we briefly discussed break even volume formula, break-even analysis, break even sales formula, break-even point example questions and answers, break-even point formula and more. Lets strat –
This chart shows the relationship between total profits and total operating costs and profits at different stages of production and sales. In this context,
Van Horne and Wachowicz said, “Break – even chart shows the relationship between total revenues, total operating costs, and profits for various levels of production and sales.”
The above-mentioned profit for determining the relationship is the operating profit before taxes. This will not include interest of debt and preferred stock dividends.
Break even point is “The sales volume required so that total revenues and total costs are equal; may be expressed in units or in sales taka / dollars.” The following example is given to gain a more comprehensive idea on the 3 topics discussed above
Operating Break Even Point Analysis:
Operating Break – Even Point The level at which the total operating cost equals the total sales is called Operating Break even Point Determining this point is crucial for explaining the behavior or nature of management leverage. At this level of sales, the firm’s profit-loss is nothing.
It can therefore be said that only operating expenses can be met by the income earned through point amount sales; However, there is no profit-loss, it is called the point of intersection.
According to LJ Gitman, “The firm’s operating break – even point is that level of sales necessary to cover all operating costs. At that point, earnings before interest and taxes (EBIT), equals zero.” That is, the amount of sales required to meet all operating expenses is called the operating intersection point of the firm. At this point the amount of interest and pre-tax profit is zero.
According to Van Horne and Wachowicz, “The break – even point is the sales volume required for total revenues to equal total operating cost or for operating profit equal to zero.” Management spends or operating profit is zero.
In conclusion, the intersection point is a special amount of sales by which all operating expenses can be met and the amount of operating profit is also zero.
Therefore, it can be said unequivocally that selling below the operating intersection point is a loss and selling above is a gain. In that case the contribution is equal to the fixed cost at the point of intersection.
That is to say, to understand the nature of management leverage, it is vital to determine the operating intersection point. Question.
Question: What is the intersection point of management? What is operating break?
Financial Break – even Point Analysis:
We have already identified the place for a firm as interest on the loan and dividends on the preferred shares. The result is financial leverage from financial constraints. The speed of financial leverage – to understand the nature of the financial intersection point must be analyzed.
The reason for this is that the amount of interest-bearing profit (EBIT) that is determined at the point of financial intersection can only be met by meeting the fixed financial expenses. From interest and pre-tax earnings (EBIT), first the interest on the loan and then the dividend to the preferred shareholders have to be paid.
Therefore, it can be said that the amount of profit and earnings per share (EPS) after interest and tax profit is zero is called Financial Break even Point.
According to Besley and Brigham Say, Financial break even analysis is a method of determining the amount of interest and pre-tax profit required to meet the fixed financial expenses of a firm and the amount of interest and pre-tax earnings per share of the firm is zero. The operating income (EBIT). The firm needs to just cover all of its fixed financial costs and produce earnings per share equal to zero.)
According to Lawrence J. Gitman, Break – Even Analysis, The level for which the firm’s earnings per share (EPS) is zero. The interest determined at the point of financial intersection and the interest on the loan and the dividend of the preferred shares are paid only as a fixed financial buy by East Moon. “(Financial break – even point is that level of EBIT for which the firm’s EPS equals to zero. It is the level of EBIT needed just to cover all financial costs, annual interest and preferred stock dividend.”)
The financial intersection point is very important for the analysis firm.
In the light of the above definition and discussion, it can be said that financial intersection point analysis is very important for the firm. For easy understanding, some features of the financial intersection point are given from the definition:
- a. A certain amount of interest and pre-tax profit is determined at the point of financial intersection.
- b. Only fixed financial expenses can be met by calculated profit.
- c. The firm’s fixed financial expenses are interest, dividends to preferred shareholders, and miscellaneous taxes.
- d. After incurring such expenses, there is no profit surplus.
- e. The absence of dividends here results in zero earnings per share.