Application of Marginal Costing

Break-even point is the volume of sales at which there is no profit or loss. Break-even charts graphically display the relationship of cost to volume and profits and show profit or loss at any sales volume within a relevant range

Approaches to break-even analysis

  • Contribution margin approach
  • An equation or a graph can be used to determine a company’s break-even point

Assumptions of break-even analysis

  1. The break-even chart is fundamentally a static analysis; normally changes can only be shown by drawing a new chart or a series of charts
  2. Relevant range is specified to define fixed and variable costs in relation to a specific period and designated range of production level
  3. All costs fall into either fixed or variable cost classification
  4. Unit variable costs remain the same and there is a direct relationship between costs and volume
  5. Volume is assumed to be the only important factor affecting cost behaviour
  6. Unit sales price and other market conditions are assumed to remain unchanged
  7. Total fixed costs remain constant over the relevant range considered
  8. Inventory changes are so insignificant that they have no impact on the analysis
  9. The technology level does not change.

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