Breakeven, Vertical Analysis and Expenses and Costs
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Question
what is break even sales?
what is vertical analysis?
what is the difference between expenses and costs?
Answer
Breakeven Sales
Breakeven sales volume is the amount of your product that you will need to produce and sell to cover total costs of production (Ag Decision Maker 2007). This can be computed under a range of sale prices with the formula below:
Breakeven Sales Volume = Total Fixed Cost/Selling Price – Variable Cost per Unit
The Contributions margin is the “selling price less the variable costs per unit”, the denominator in the equation above. It is the amount of money that the sale of each unit will contribute to covering total fixed costs. The breakeven level is the number of units required to be produced and sold to generate enough contributions margin to cover fixed costs (Ag Decision Maker 2007).
Vertical analysis
Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. The most common use of vertical analysis is within a financial statement for a single time period, so that one can see the relative proportions of account balances.
Expenses and Costs
The difference between cost and expense is that cost identifies an expenditure, while expense refers to the consumption of the item acquired. These terms are frequently intermingled, which makes the difference difficult to understand for those people training to be accountants.
References
Ag Decision Maker (2007) Breakeven Sales Volume. Available via: https://www.extension.iastate.edu/agdm/wholefarm/html/c5-201.html
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