break even analysis

• Break-even point


  Level of output where total costs and total revenue are the same, so no profit nor loss is made
• Calculating the break-even point

  1. Need to know: fixed cost, variable cost per unit, selling price per unit

  2. Formula: Break-even point = Fixed cost / (Selling price per unit - Variable cost per unit)
• Break-even chart


  Graph that shows total cost and total revenue; break-even point is where total cost and total revenue intersect
• Margin of safety


  Amount of output available to be sold above the break-even point where the business makes a profit
• Limitations of break-even chart


  • Total cost and total revenue may not be straight lines
  • Assumes all output is sold and no stocks are held
  • Accuracy depends on quality and accuracy of data used
• Both large and small businesses should be interested in break-even
• Small business owners may not be aware of the mathematical interpretations of break-even but they are likely to fully understand the concept
• Larger businesses may use break-even analysis more formally, e.g. calculating the break-even point of a particular business venture or a new product