The main objective is to find the cut-off production volume from where a firm will make profit.
The total sales revenue of the firm is
S = s×Q
Where,
S = Sales revenue
s = Selling price per unit
Q = Production volume
The intersection point of total sales revenue (S) and Total cost is called break-even point (BEP).
At intersection point, the total cost and total revenue are equal. This point is called no loss or no gain.
Production quantity is less than break even point, then the total cost is more than total revenue. It will leads to loss.
Production quantity is more than break even point, then total revenue will more than total cost. It will leads to gain.
The total cost of the firm is
TC = Total variable cost + Fixed cost
TC = (v× Q)+ FC
Profit = Sales - (Fixed Cost + Variable Cost)
= s × Q – (FC + (v ×Q))
Break-even quantity = FC/(s-v)
Break-even sales =
The difference between the sales and variable costs are termed as contribution.
Contribution = sales – variable costs
The margin of safety is the sales over and above the break-even analysis.
M.S = Actual sales – break-even sales
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