LEICESTER' LTD BREAK-EVEN POINT AND THE MARGIN OF SAFETY1
EVALUATION OF ESTIMATED PLANS3
LIMITATIONS OF BREAK-EVEN ANALYSIS4
ACCOUNTING CONCEPTS: HISTORICAL COST, PRUDENCE, ACCRUALS, AND GOING CONCERN5
The basis of financial decision-making is economic analysis. There are a number of evaluation tools currently offered to construction managers, including present worth analyses, benefit/cost analysis, equivalent annualized costs, cash flow analysis and break-even. Berryman & Nobe (1997)
Some of the most significant decisions to be made in financial management are those concerning to pricing; the prices must be high enough to cover all costs and offer a profit. Cost-volume-profit analysis is used to help us how changing volumes of sales or revenue affect profits. The foundation of this analysis is the calculation of break-even point and understanding how profit will vary with a change in the volume of sales.
LEICESTER' LTD BREAK-EVEN POINT AND THE MARGIN OF SAFETY
'The break-even point is defined as the point where sales or revenues equal expenses'. There is no profit made or loss incurred at the break-even point. This figure is important for anyone that directs a business since the break-even point is the lower limit of profit when setting prices and determining margins; if the break-even point is not achieved, that business will (or should) finally go out of business. Clearly the break-even point becomes very significant when calculating a strategy for net profit. Deal (1999-2003)
The break-even point can be expressed:
total fixed costs
break-even point =
contribution margin ratio
Total Fixed costs are the sum of the fixed costs. Fixed costs are those costs that throughout the forecast period, are unaffected by changes in output. Fixed costs take account of, but not limited, depreciation...