Cost-Volume-Profit and Break Even Analysis;

In order to plan and control the activities associated with a business, management uses a number of tools. Cost-volume-profit analysis is one of the most important analytical tools utilized by the management. It helps us to learn the behaviour of cost and profit in response to varying level of business activity. The understanding of the relationship between costs and volume is useful in calculating the effects of decisions and strategies on the net profit earned.

Cost-volume-profit analysis can be utilized to determine the following:

1. Level of sales at which break even is reached (all the expenses of the firm are covered).

2. (b) Units of product needed to be sold to obtain a particular income. (c) Change in profit with the change in business capacity or fixed cost.

3. (d) Effect of change on the income as a result of changing the wages of sales personal from fixed to straight commission on sales.

Cost-volume-profit analysis is useful for investors and creditors too as it determine the ability of business to pay debts and increase dividend payments. Therefore the concept of cost-volume-profit analysis can be applied to the business as a whole or to the individual segments of the business.

Objectives

After studying this unit, you should be able to

• Response of variable, fixed, and semi variable costs to the changes in sales volume,
• Construction of a cost-volume-profit or break-even graph,
• Use of break even graph in buy-make decisions,
• Application of break-even analysis to multiproduct case,
• calculation of the sales volume needed to achieve break-even, and
• Use of these analyses in the evaluation of various marketing strategies.