How To Use Break Even Point Analysis Accounting Essay

The paper is treatment about the interruption even indicate analysis ( BEA ) as a tool for pull offing profitableness of a concern. Break even point is attained when the gross revenues grosss are equal to the costs of a concern. The two methods of BEA have been provided with proviso of illustrations to explicate the assorted facets of the subject. The usage of BEA at Apple Inc. has been discussed to demo the existent concerns using the tool.

I. Introduction

Accounting for direction ( 2010 ) defines break even point analysis ( BEA ) as the degree where the net income of an organisation is zero. At BEA, the gross revenues are equal to the amount of the fixed costs and the variable costs. The entire cost of an organisation is composed of the fixed costs and the variable costs ( Accounting for direction 2010 ) .

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BEA gross revenues = fixed cost + variable cost

The fixed costs are those costs which do non alter irrespective of the measure of trade goods sold. Costss which are incurred when get downing the concern are fixed costs, for illustration, insurance, rent and computing machines. The concern must incur such costs before it sells its first point. The variable costs recur and are absorbed by each point sold by the concern. For illustration, when runing a seamster store, you will purchase fabrics at a certain monetary value, say $ 2 per square pes. The $ 2 will stand for the variable cost. Other variable costs involved will be labour, other stuffs, and others ( Richards, n.d. ) .

Break even indicate analysis is used by the direction to do determinations about the activities of the company. It provides the concern with equal information about the lowest degree of operation where the concern will accomplish no net incomes. The direction should avoid runing below the BEA point since this vindicates that the concern is runing at a loss. Above the BEA, the concern makes net incomes and can prolong all the costs incurred in the production of trade goods ( Gordon Bing, 1996 ) .

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From the graph, the interruption even point is attained at a gross revenues degree of 3 units and $ 20. Below this point, the concern incurs a loss as indicated on the graph. Above the BEA, the concern makes a net income. The entire gross curve is above the entire cost curve above the BEA point bespeaking that the concern is doing a net income. When losingss are being incurred, the entire gross curve is below the entire cost curve. The fixed costs are changeless and do non alter as the gross revenues volume/value alterations. The curves for variable costs and the fixed costs are below the entire costs curve but when they are combined, they give the sum costs curve. The entire gross curve and the variable costs curve get down at the zero grade bespeaking that there is a point where the company can non incur variable costs or do any gross at all. The fixed costs curve is above the beginning. This suggests that the concern must incur fixed costs at all times whether it is runing or non ( Gordon Bing, 1996 ) .

II. Aims of Calculating the Break Even Point Analysis

The chief aim of the interruption even analysis is to supply informations which helps place the minimal production degree. Businesss are established to do net incomes. The BEA analysis indicates the gross revenues degree where the company is doing net incomes or losingss. A loss is made when the gross revenues of the company are below the costs. This is a point below the BEA point. Net incomes are made when the gross revenues degree is above the BEA. At the BEA, the concern is neither doing a net income nor a loss ( Frongello, n.d. ) .

III. Premises for Calculating the Break-Even Point

The analysis assumes that the mean unit gross revenues monetary value is changeless. There is an premise that there are no price reductions given to clients during the period. The merchandising procedure is assumed to be changeless and they do non alter with clip. The gross revenues prognosis are believed to be accurate in gauging the monetary value for merchandises and any alterations that may impact the monetary values in the market ( Accounting for direction 2010 ; Berry, 2003 ) .

The variable costs per unit are assumed to be changeless in the accounting period. The variable cost is the sum spent to purchase goods for resale. In the sale of services, the variable cost is amount incurred to present the services ( Berry, 2003 ) .

A status where the fixed costs are changeless is assumed to be. Fixed costs are the disbursals which must be incurred by the concern even when it is non in operation. These are the basic costs which a concern endeavor must incur to run. The fixed costs do non alter with alterations in the gross revenues volume. An addition or a lessening in the gross revenues volume will non impact the fixed costs ( Dennis, 1995 ) .

A company bring forthing a scope of merchandises combines the different monetary values to obtain a individual monetary value which reflects the overall monetary value for all the merchandises manufactured by the company. To obtain the BEA of the concern is possible when utilizing one monetary value which provides an norm for all the merchandises of the company ( Bauer & A ; Dahlquist, 1999 ) .

IV. Methods for Calculating the Break-Even Point

BEA is calculated utilizing the equation method or the part border method. The two methods give the same reply.

1. The Equation Method

This method is based on the part border, that is, part border is the difference between the gross revenues and the variable costs ( Wittwer, 2010 ) .

Contribution border = sales-variable costs

Therefore, at BEA, net incomes equal the part border less the fixed costs

Net income at BEA = part margin-fixed costs

Or net income at BEA = [ ( sales-variable cost ) -fixed cost ]

When the equation is rearranged, the gross revenues at BEA will be calculated as follows:

Gross saless at BEA = variable costs + fixed costs + net income

The definition of BEA provides that the net incomes made are zero at a given degree of gross revenues. Therefore, the gross revenues at BEA can be computed by measuring the point where gross revenues of the concern equals the amount of the fixed cost, variable cost and nothing net income.

Example ( Accounting for direction 2010 ) :

Provided the undermentioned information, calculate the BEA in gross revenues volume and in gross revenues value ( dollar )

Unit of measurement merchandising monetary value = $ 200

Unit variable cost = $ 100

Fixed costs = $ 30,000


BEA gross revenues volume ( Q ) = variable cost + fixed costs + net income

$ 200 Q = $ 100Q + $ 30,000 + $ 0

$ 100 Q = $ 30, 000

Q = $ 30,000 / $ 100

Q = 300 unit

Where Q is the measure of units sold

To happen the BEA gross revenues in dollars, this can be done by multiplying the BEA gross revenues units by the unit merchandising monetary value.

300 units X $ 200 per unit = $ 60,000

2. Contribution Margin Method

This is a short cut to the computation of the BEA utilizing the equation method. The chief construct is that the units sold provide a specific part border that covers the fixed costs. Using this method, the units sold are obtained by spliting the entire fixed costs by the part border:

BEA gross revenues units = fixed cost / unit part border ( Wittwer, 2010 ) .

The difference between this method and the equation method is that it uses the part border ratio. The equation method uses the unit part border. Therefore, the BEA gross revenues in dollars equal the fixed cost / part border ratio. The part border method is used where a concern has several merchandise lines and wants to cipher a individual BEA for the full concern ( Bauer, & A ; Dahlquist, 1999 ) .

BEA gross revenues in dollars = [ fixed cost / 1 aa‚¬ ” ( variable cost / gross revenues ) ] ( Wittwer, 2010 ) .

The reply will be the same when compared to the equation method, for illustration, utilizing the information in the inquiry for equation method ( Accounting for direction 2010 ) .

BEA ( dollars ) = [ $ 30,000 / 1 aa‚¬ ” ( 100 / 200 ) ]

= $ 30,000 / 1 aa‚¬ ” 0.5

= $ 30,000 / 0.5

= $ 60,000

V. Advantages of Calculating the Break-Even Point

The BEA analysis is used for doing determinations by the direction. It is a tool used to bespeak the minimal degree of activity for the concern to forestall losingss in its operations. It provides a relationship between the cost, production, volume and returns. The directors can use it to place the alterations in fixed costs, variable costs, monetary values for trade goods and the grosss and their consequence on the degree of net income and the interruption even point. BEA analysis is most applicable in partial budgeting and capital budgeting methods of concern analysis ( Accounting for direction 2010 ) .

VI. Restrictions for Calculating the Break-Even Point

The merchandising monetary values will ever alter over a given period of clip. A state of affairs where the monetary values are changeless is an ideal state of affairs and does non be in the ordinary market topographic point. Monetary values will be affected by rising prices, dickering power of clients, price reductions offered to clients, and many other causes ( Fuller, 1994 ) . The alterations in the merchandising monetary values of the merchandises of a company will impact the interruption even indicate such that a changeless value will non be obtained over a given period of clip. Companies bring forthing a scope of merchandises may happen it hard to acquire an mean monetary value to be used in the analysis of the BEA. A individual monetary value is required in the analysis ( Frongello, n.d. ) .

The variable costs alterations with clip and they are ne’er changeless. The costs of buying goods for resale will be determined by the current monetary values in the market. The cost of presenting services will alter depending on the predominating market conditions ( Wittwer, 2010 ) .

The fixed costs change in certain fortunes. They are non ever changeless. When the monetary values of the fixed costs change, this affects the interruption even point of a concern. For illustration, the alterations in the monetary values for electricity will impact the entire costs ( Guidry, Horrigan & A ; Craycraft, 1998 ) .

The combination of different monetary values of all the merchandises of the company does non supply accurate informations since different merchandises will hold different monetary values. The market for different merchandises may be different and uniting the monetary values will supply informations which is misdirecting ( Frongello, n.d. ) .

VII. Case Analysis

To keep a competitory advantage in the market, a concern should be able to entree the BEA analysis to place the strength of the concern. To take down the interruption even point, the direction can ; take down the direct costs. This will be achieved through application of efficient engineering, effectual agendas to cut down costs and increase productiveness of labour. The fixed costs must be put under control. The company can raise the monetary values of its merchandises to increase the gross revenues gross ( Kee, 2007 ) .

Apple Company has been successful in the market due to the application of efficient engineerings which lower the fixed and variable costs. However, due to the increasing competition in the market, the company has maintained low monetary values for its merchandises. The company manufactures computing machine package, electronics and commercial waiters. The package manufactured by the company includes Mac OS X runing system, iTunes, iLife, iWork, Aperture, Final Cut Studio, and Logic Studio. The computing machine hardware manufactured by the company includes iPod, iPhone, iPad and the Macintosh computing machines. Apple Inc was established in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne. Ronald Wayne subsequently sold his portions to the other two spouses and ceased to be a spouse. During the foundation of the company, Mark Markkula provided financess and expertness. The central office of the company are based in Cupertino, California. ( Linzmayer, 2009 ) .

Several schemes have been adopted by the company to cut down the fixed and variable costs. The gross revenues of the company have been increased by the usage of engineering in the selling system. Apple has been able to keep low monetary values for its supplies by dickering with the providers of the stuffs used in the production. Some of the providers to the company are General Electric, Intel and others. The company has introduced retail shops and online shops as a scheme to increase its gross revenues volume. The retail shops have been established in many parts of the state to do the merchandises of the company accessible to many clients. Online shops have been used to enable many clients purchase the merchandises through the cyberspace. Most of the activities of the company are done above the interruption even point and this has created a competitory border of the company. The major rivals of the company are Microsoft and IBM. Despite their big capital base compared to Apple, these companies have lost most of the market portion to apple. To keep a favourable BEA point, most of the costs are reduced to offer merchandises at favourable monetary values. The company has maintained a favourable pay degree for its employees ( Linzmayer, 2009 ) .

VIII. Decision

Break even indicate analysis is used to calculate the degree of gross revenues where the net incomes of the concern peers zero. It is a point where the entire costs equals the grosss made by a concern. The concern neither makes a net income or a loss at the BEA point. All the costs are covered by the gross revenues. The direction of a concern uses the interruption even analysis to place the minimal degree of activity the concern can run. The BEA analysis has several premises whereby the merchandise monetary values, fixed costs and variable costs are assumed to be changeless over the accounting period. The analysis has several restrictions since the monetary values of merchandises change with alterations in the market conditions. The fixed costs every bit good as the variable costs are ne’er changeless and will alter with clip. Companies have applied the system of BEA in their systems to keep a competitory border in the market. The usage of engineering has been the major tool used by concerns to cut down the costs of production. Apple Inc has been successful in the market by using engineering and leading in its activities to cut down costs of production and increase gross revenues. This has brought about big net incomes to the company.

