EFFECTIVE APPLICATION OF BREAKEVEN ANALYSIS IN MANAGEMENTS FIRMS

CHAPTER ONE

1.0     INTRODUCTION

          In considering how the management accountant can be assistance in producing answer to questions about the consequences of following a particular course of action. Such questions might include: What would be the effects of profits if we reduce our selling price and sell more units? What sales volume is required to meet the additional fixed charge from a proposed plant expansion?  Should we pay our sales personals on the basis of salary only or on the basis of commission only, or by a continuation of both? These and other questions can be considered using Breakeven Analysis which is the most widly known form of cost-volume-profit analysis. For this reasons, the two terms are used interchangeably by many.

          Breakeven analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in total sales revenue, is a specific way of presenting and studying the inter relationship between cost-volume and profit. As a model of these relationships. Breakeven analysis simplifies the real work condition which a firm will face. It provides information to management in most lucid and precise manner and it is an effective and efficient financial reporting system.

          Breakeven analysis is based on the relationship between sales volume, cost are profit in the short run, the short run being a period which the output of a firm is restricted to the same available  from the current operating capacity. In the short-run some input can be increased but other cannot.