Break-Even Analysis

Break-Even Point: The level of sales at there is no loss or profit. The point at which the total of fixed and variable costs is equal to total sales revenues.

Fixed Versus Variable Costs

—  Fixed costs: Contractual costs that must be paid regardless of output or sales

—  Variable costs: Costs that vary directly with production and sales

The Algebraic Method

The difference between unit selling price P and unit variable costs VC is the contribution margin that can be applied to recovering fixed costs.

Price Planning

Determining the impact of changes in unit selling price on the break-even point in units. Rising prices decrease the break-even point; lower prices increase the break-even point.

Profit Planning: Determining the required level of output to achieve a profit objective. 

Graphical Break-Even Analysis

Break-Even Analysis: Strengths and Limitations

Planners are forced to interrelate cost, volume, and profit in a realistic way. Planners are able to ask what-if questions concerning the impact of price, costs, and profit objective changes. A neat separation of fixed and variable costs is difficult to achieve. Complex factors in supply and demand interfere with the linear projections (point estimates) of the analysis.