Introduction to accounting - Essay Example

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Extract of sample
Introduction to accounting

Break even analysis is used in showing the relationship between selling prices, sales volume, variable costs, fixed costs and profits at various levels of activity. It is also referred to as cost-volume profit analysis. It used in determining the break-even point. BEP is the level of activity where the total revenue equals the total costs. Therefore, no profits are realized at the BEP. Appendix 2 shows the workings for the break-even point of the energy drink. At the level of production of 4,286 all fixed and variable costs will have been covered by sales revenue.However break even analysis has its limitations. To begin with, breakeven analysis assumes that fixed cost, variable costs and sales revenue behaves are linear. However, this is not the case since some overhead costs may be stepped in nature. As a result, the straight sales revenue line and total cost line tend to curve beyond certain level of productionAnother limitation of break even analysis is that it assumes that all the stock produced is sold. Therefore, changes in stock levels are not taken into account in the breakeven chart. Finally, breakeven analysis is only suitable in providing information to relatively small companies that produce one type of products. Thus it’s not suitable for companies producing different product.Margin of safetyMargin of safety measures the amount by which sales may decrease before a company incurs a loss. Forecasting is used in estimating future performance of the business. ...Show more

Summary

The purpose of this report “Introduction to accounting” is convinces investors to consider investing in this company. The new company focuses in producing an energy drink. Therefore, marginal costing is used to aid understanding regarding the costs involved.

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