Break even analysis is a logical extension of marginal costing

Break even analysis is a logical extension of marginal costing. It is based on the same principle of classifying the operating expenses into fixed and variable. Now a days it become powerful instrument in the hands of policy makers to maximize profits.

There may be change in the level of production due to many reasons, such as competition, introduction of a new product, trade depression or boom, increased demand for the products, scarce resources, change in the selling prices of product etc. in such cases management must study the effect on profit on account of the changing level of production. A number of techniques can be used as an aid to management in this respect.

The term ‘break even analysis’ is interpreted in the narrower as well as broader sense. Used in its narrower sense, it is concerned with finding out the break even point, i.e., level of activity where the total cost equals total selling price. Used in its broader sense, it means that system of analysis which determines the probable profits at any level of production. The break even analysis establish the relationship of cost, volume and profit; so this analysis is also known as ‘cost Volume Profit Analysis’.

The study of break even analysis can be made:

• Mathematical relationship between cost volume profit.
• By preparing break even charts.

To understand mathematical relationship between cost, volume and profit, it is, desirable to understand the following four concept, their calculation and applications.

• Contribution
• Contribution/sales(C.S) or Profit Volume (P/V) Ratio
• Break Even Point
• Margin of Safety