VOLUME COST PROFIT ANALYSIS
Profit planning is a function of the selling price of a unit of product the variable cost of making and selling the product the volume of product units sold, and in the case of multiproduct companies sales-mix and finally, the total fixed costs. The volume cost-profit (VCP) analysis is a management accounting tool to show the relationship between these ingredients of profit planning. The entire gamut of profit planning is associated with VCP inter-relationships. A widely used technique to study VCP relationships is break-even analysis.
A break-even analysis is concerned with the study of revenues and costs in relation to sales volume and particularly, the determination of that volume of sales at which the firm's revenues and total costs will be exactly equal (or net income = zero). Thus, the break-even point (BEP) may be defined as a point at which the firm's total revenues are exactly equal to total costs yielding zero income. The no profit no loss point is a break even point or a point at which losses cease and profits begin.
Break-even analysis as a technique, seeks to provide answers to the following questions
1. What sales volume is necessary to produce an X amount of operating profit?
2. What will the operating profit or loss at X sales volume be?
3. What profit will result from an X per cent increase in sales volume?
4. What is the additional sales volume required to make good an X per cent reduction in selling prices so as to maintain the current profit level?
5. What will the effect on operating profit be if the company's fixed costs have increased?
6. What will the effect on income be if the firm achieves a reduction in variable costs (say, material or direct labour)?
7. What is the required sales volume to cover the additional fixed charges from the proposed new project?
8. What will the effect on operating profit of the firm be if the sales mix is changed?
9. What will the effect on income be if there is an increase in fixed costs by an X amount due to new plant but will decrease the labour costs by amount per unit?
10. What sales volume is needed to achieve the budgeted profit?