What is the break-even sales increase? Interpret.
The company would be defining the sales after considering the estimated revenues. All those revenues must have costs against it which need to cover for the purpose of calculating the profit for the company. These costs have two types fixed cost and variable cost. Fixed cost would be considered as the cost which is not related with the units produced and remains same. Variable cost is related to the units and would changed with the change in the units.
Company needs to cover both the cost for the purpose of continuation of all the operating activities. These would be taken into consideration the variable cost first because of short run capabilities of running business and then calculates the contribution margin. This is a basis through which break even sales is calculation.
Formula:
Break even point for units = Fixed cost/Contribution margin per unit OR
Break even sales = Fixed cost/Price volume ratio
Price volume ratio = Sales-Variable cost/Sales*100
This formula is referring that at breakeven point, the company has covered its cost of sales and now onwards would be selling for the purpose of gaining profit. This is a situation of no profit no loss, which provides that company is capable to run in a short period of time. It is a usual goal for the company in the initial days of its working.
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