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Faculty
Dr. Amit Kumar Nag
Associate Professor
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Lecture Outline
Introduction
Importance of Cost Volume Profit
Analysis
Break Even Point
Assumptions of Break Even Point
Limitations of Break Even Point
Application of Break Even Analysis
Computation of Break Even Analysis,
Profit Volume Ratio & Margin of Safety
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Cost- Volume Profit Analysis- Introduction
The Study of relationship among three
important factors, viz., cost, volume and
profit is known as Cost-Volume-Profit
Analysis.
Narrower Sense- Concerned with finding
Break Even Point only.
Broader Sense- It is a technique of
management accounting which determines
profit, cost and sales value at different
levels of production.
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Importance of Cost- Volume-Profit
Analysis
Setting up of Flexible Budget
Determination of Break Even Point (B.E.P)
Profit Planning
Decision relating to selection of alternatives
Performance Evaluation for Control
Helpful in Price Fixation
Allocation of Overhead Costs
Analysis of effect of changes in Cost
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Meaning of Break Even Point
Break Even Point is that point of production or
sales at which the firm neither earns any profit
nor incurs any loss.
Definition
The Break Even Point is that point of sales
volume where total revenues and total
expenses are equal, it is also said as the point
of zero profit or zero loss.
-Charles T Horngren
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Assumptions of Break Even Point
Fixed and Variable Costs
Proportionate Variable Cost
Certain and Constant Fixed Cost
Unchanged Selling Price
Linear Behaviour
Technological Stability
No role of Stock
No change in General Price Level
Unchanged Sales Mix
Relationship Between Volume and Cost
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Limitations of Break Even Point Analysis
Division in Fixed and Variable Costs
Static Concept
Limitation of Linear Behaviour of Costs
Difference in production and sales
Change in Sales Mix
Maximum and Optimum Production
Capital employed is ignored
Limitation of Lack of Perfect Competition
Sale of many products
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Application of Break Even Point Analysis
Determination of Break Even Point
Calculation of Profit at different levels of sales,
Determination of sales to earn desired profit
Fixation of new selling price at a particular break even
point
Estimation of Margin of safety
Estimation of effect of change in fixed and variable
costs on B.E.P. and sales
Make or Buy Decisions
Determination of optimum sales-mix
Decision of change of capacity
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