3 – Break-Even Analysis
More many businesses, especially new ones, breaking-even is an important business objective. They do not want to make a loss, so using break-even would help them to set their targets for sales and track how well they are going.

Break-Even Quantity
The break-even quantity is the number of units a business must sell in order for their total costs to equal their total revenue:

At this point, the business is making neither a profit nor a loss. There are a few ways that you can calculate the break-even point. The first is by looking at the chart and finding the cross-over point of the total costs and total revenue

The same TC = TR rule can be used to find the value algebraically.


For example, if the price above was $105, and the variable costs per unit were $5, then:

The final method is to use the unit contribution. The equation is:

The unit contribution is the selling price minus the average variable costs.

Profit or Loss
The business can use the break-even point to determine the exact point where they will be trading at a profit, or loss. It can also be used as a decision-making tool to determine whether producing a certain product is worthwhile. They would also be able to get an indication of how much profit they can expect to make. Profit can be increased using:    Increasing sales revenue Reducing variable costs Lowering fixed costs


Margin of Safety
This is the difference between the firm’s actual sales and the break-even quantity.

This is also placed on the break-even chart to show how much risk there is in a certain decision for the firm. This should not be expressed as a monetary value, but as a volume of sales. You can also express the margin of safety as a percentage of the break-even quantity.


Graphing the Break-Even
The break-even chart should include the following elements:         Title (i.e. Break-Even Chart for Company X) x-axis labelled Output (units) y-axis labelled with Costs, Revenues and Profit ($) Total fixed costs line (TFC) The total revenue line (TR) Total costs line (TC) Break-even point Break-even quantity

The following elements may also be required in for the question, so make sure you know how to correctly annotate the graph with them.   Profit Margin of safety


Sign up to vote on this title
UsefulNot useful