Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).
The formula for break even analysis is as follows:
Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
- Fixed costs are costs that do not change with varying output (i.e. salary, rent, building machinery).
- Sales price per unit is the selling price (unit selling price) per unit.
- Variable cost per unit is the variable costs incurred to create a unit.
Interpretation of Break Even Analysis
As illustrated in the graph above, the point at which total fixed and variable costs equal to total revenues is known as the break even point. At the break even point, a business does not make a profit or loss. Therefore, the break even point is often referred to as the ‘no-profit’ or ‘no-loss point.’
The break even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.
Therefore, the concept of breakeven point is as follows:
- Profit when Revenue > Total Variable cost + Total Fixed cost
- Break-even point when Revenue = Total Variable cost + Total Fixed cost
- Loss when Revenue < Total Variable cost + Total Fixed cost