3.3 Break-even analysis
What we will study?
By the end of this unit you should be able to:
- Use graphical and quantitative methods to calculate the break-even quantity, profit and margin of safety
- Use these methods to analyse the effects of changes in price or cost on break-even, profit and margin of safety
- Calculate the required output level for a given target revenue or profit
- Calculate the break-even target price for a given level of output
- Analyse the assumptions and limitations of break-even analysis
What does 'break-even' mean?
If a business is able to calculate the break-even quantity that must be sold to cover all costs, it will be easier to make important production and marketing decisions. At the break-even level of output, profit is zero. This must mean that at break-even:
Total Costs = Total Revenues
No profit or loss is made.
Total Costs = Total Revenues
No profit or loss is made.
