Marginal Costing & Break-even analysis
Marginal cost
Marginal cost is defined as the amount of any given volume of output by which aggregate costs are changed, if the volume of output is increased or decreased by one unit.
Example: If the total costs of producing 10 units is $550, and for 11 units is $600, the marginal cost of producing the 11th unit is $50($600-$550).
Marginal cost is otherwise known as incremental cost, extra cost, differential cost, variable cost or direct cost.
Break-even Point
Break-even point is that point at which there is neither profit nor loss. It is at point costs are equal to sales. It is otherwise called as balancing point, neutral point, equilibrium point, loss ending point, profit beginning point etc. After BEP is achieved, all the further sales will contribute to profit.
At BEP, Sales – Variable cost = Fixed costs. OR Contribution = Fixed costs.
Break-even analysis
Break-even analysis is an analytical technique that is used to determine the probable profit at any level of production. It is basically an extension of marginal costing.
Break-even chart
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Advantages of Break-even analysis
1. Profit planning
2. Product planning
3. Activity Planning
4. Lease Decisions
5. Make or buy decisions
6. Capital profit decisions
7. Distribution channel decisions
8. Price decisions
9. Choosing Promotion Mix
10. Decision regarding profitability of products or department.
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