Break Even Analysis:

Break even analysis is a technique to widely used by production management and managements
accounts. Total variable and fixed cost are compared with sales revenue in order to determine the
level of sale volume sales value or production at which the business makes neither profit nor loss.

Break-even point occurs:

This point is occur when total income is equal to total cost.
In term of equation it is written as;
𝐹
𝑁∗ =
𝑅−𝑉
Where F is fixed cost in dollar per year, R is amount received per unit of production in dollar and
V is variable cost per unit of product.

Marginal Contribution:
Term 𝑅 − 𝑉 is called marginal contribution.

Annual profit:
Annual profit in term of Break-even point is given as;

𝑃 = (𝑅 − 𝑉 )𝑁 − 𝐹
𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 ∗ 𝐵𝑟𝑒𝑎𝑘𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 − 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

Graphically, this can be seen as;

  It has been observed that Break-even point is inversely proportional to marginal
Contribution (Can be seen from figure 8.5)

Profit volume Function

This is simply a graphical frame work assists in understanding relationships among price, fixed
cost, variable cost and profit.
It has been observed that:

 Any change in R or V (marginal contribution) without change in Fixed price, F will

decrease profit.
 Any decrease in marginal contribution will also shift Break-even Point Marginally right
side and thus causing decrease slope of profit line.

𝑷𝒓𝒐𝒇𝒊𝒕 ∝ 𝑺𝒍𝒐𝒑𝒆 𝒐𝒇 𝑴𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏

Graphically, it can be represented as;