Disadvantages and Advantages of Break-Even Analysis

Updated on July 27, 2016

What Is Break-Even Analysis?

Break-even analysis is the relationship between cost volume and profits at various levels of activity, with an emphasis placed on the break-even point. This point is where the business receives neither a profit nor a loss, when total money received from sales is equal to total money spent to produce the items for sale.

An example of a break-even analysis.
An example of a break-even analysis.

Advantages and Uses

Break-even analysis enables a business organization to:

  1. Measure profit and losses at different levels of production and sales.
  2. Predict the effect of changes in sales prices.
  3. Analyze the relationship between fixed and variable costs.
  4. Predict the effect of cost and efficiency changes on profitability.

Disadvantages

Even with its advantages and uses, there are also several demerits of break-even analysis.

  1. Assumes that sales prices are constant at all levels of output.
  2. Assumes production and sales are the same.
  3. Break even charts may be time consuming to prepare.
  4. It can only apply to a single product or single mix of products.

Formulas

There are two ways to calculate the break-even point, in units and in sales revenue.

  1. The first way is to divide the fixed cost by the contribution per unit. This gives the result in units.
  2. Divide the fixed cost by the contribution-to-sales ratio. This gives the sales revenue.The contribution-to-sales ratio is given by dividing the contribution per unit by the selling price per unit.

Example of a Break-Even Point

ABC Ltd expects to sell 10,000 units at $10 each. The variable cost per unit is $5 and the fixed cost is $15,000 per annum. Calculate the break even point in units and in sale revenue.

  • To calculate the break-even point in units, use the formula-fixed cost divided by the contribution per unit. In this example you would divide $1,000 by contribution (which is the selling price of $10 minus the variable cost per unit of $5). $15,000 divided by $5 is 3000 units
  • To calculate the break-even point in sales revenue, divide the fixed cost by the contribution-to-sales ratio. In this example, $15,000 divided by ($5 divided by $10, or .5). The final answer is $30,000. We know this is the correct answer because when we multiply the break-even point in units by the selling price, we get the same answer.

Creating a Break-Even Chart

Business Example:

Fictional Company
 
Unit selling price:
$36
Unit variable expenses:
$28
Total fixed expenses:
$50,000
Actual sales:
7,000 units

A break-even chart is a graphical representation of the break-even point, profits, losses and margin of safety. Using information from the example above, we will create a chart that shows:

  • fixed cost
  • total revenue line
  • margin of safety
  • loss region
  • total cost line
  • break-even point
  • profit region
  1. Work out the total revenue by multiplying the unit selling price by the actual sales: 36 × 7,000 = 252,000
  2. Work out the total cost by multiplying the unit variable expenses by the number of units sold and adding that to to the fixed expenses: 28 × 7,000 = 196,000 + 50,000 = 246,000
  3. Now set up your chart. Note that when plotting, the first number in brackets is the x (horizontal) axis value and the second digit after the comma is the y (vertical) axis value. For this chart, you will show total unit sales along the x axis in thousands. Along the y axis you will show sales in tens of thousands of dollars, since there were 7,000 units sold and $50,000 in total sales.
  4. Now draw the fixed cost line. Make a dotted line from (0, 50,000) to (7,000, 50,000).
  5. Next you will make the Total Revenue line. Plot a point at (7,000, 252,000) and draw a line from zero to that point. Label the line.
  6. To create the Total Cost line, plot the point (7,000, 246,000) and draw a line from (0, 50,000) to that point. Label the line.
  7. Where the two lines meet is called the Break-Even Point and should to be labeled as such. The region below the break-even point should be labeled the Loss Region. The region above the break-even point should be labeled the Profit Region.
  8. Draw a dotted line from the break-even point to meet the x axis. From where it touches the x axis, to the actual sales, is the Margin of Safety in Units.
  9. To illustrate the margin of safety in dollars, draw a dotted line from the break-even point to the y axis. From where the line touches the y axis, to the total revenue line, is the Margin of Safety in Dollars.

The finished chart showing a break-even analysis for a fictional company.
The finished chart showing a break-even analysis for a fictional company.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

Questions & Answers

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      • profile image

        hi_im_rice@icloud.com 

        2 days ago

        i like dogs, alot, like so much. Everytime I see one I just get the sudden urge to pounce on them like a mad man

      • profile image

        floor man, master in the art of coolness 

        2 days ago

        hmmm yes the floor here is made of floor

      • profile image

        rhys dee 

        2 days ago

        really helped me out, thanks guyzzzzz!!!!!! :)

      • profile image

        callum cru 

        2 days ago

        amazzzzzing education :)

      • profile image

        Petros "Zakes" Jiyane 

        12 days ago

        That's perfect educating People. keep up the good work.

      • profile image

        Joel 

        2 weeks ago

        Thanks for helping academic researchers

      • profile image

        BingBong 

        3 months ago

        Thank you so much this is very handy

      • profile image

        bothwell nyamayaro 

        6 months ago

        that is splendid

      • profile image

        charles 

        8 months ago

        this is such a good guide on how this thing works i was able to do my business because of you and this article

      • profile image

        alima 

        8 months ago

        thanks

      • profile image

        jenny 

        8 months ago

        this really helped my business, xd lol

      • profile image

        abdi big head 

        10 months ago

        so goo

      • profile image

        Name 

        11 months ago

        thanks, this helped me in my business work :D

      • profile image

        Thanks. 

        12 months ago

        Thanks.

      • profile image

        meera 

        16 months ago

        how can we do the chart

      • profile image

        devvo1 

        17 months ago

        if you want some i will give it ya

      • profile image

        SparklyBubble 

        19 months ago

        You haven't really explained the advantages or disadvantages that well.

      • profile image

        Thanks Thanks thanks I'm greatful 

        19 months ago

        It was very much helpful

      • profile image

        Welikhe Geofrey 

        19 months ago

        Thanks Very good

      • profile image

        prayer 

        20 months ago

        helped a lot .thanks hey

      • profile image

        Sofia Dotkova 

        20 months ago

        Farkhan is the best let me sit here !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

      • profile image

        Chamali 

        20 months ago

        Why breakeven analysis can work only for single product

      • profile image

        jimmy 

        20 months ago

        cheers jeff

      • profile image

        hello, is it me you're looking for? 

        21 months ago

        coudn't you say advantages better?

      • profile image

        varun kumar jain 

        22 months ago

        awsome thing

      • profile image

        anonymous 

        2 years ago

        i don't really understand the advantages

      • profile image

        bleesing tylor 

        2 years ago

        helped on hw to calculate breakeven

      • profile image

        bob 

        2 years ago

        helped in my business lesson

      • profile image

        byabashaija emmanuel 

        3 years ago

        i have learnt how to plan for a certain company

      • profile image

        GODFREY GASIGWA 

        3 years ago

        Thanks alot its so interesting and it helps us as students to pass course works

      • profile image

        rojj 

        3 years ago

        is very useful for me thank u sooo much

      • profile image

        hussain 

        3 years ago

        nice

      • mathslover profile imageAUTHOR

        mathslover 

        3 years ago from Barbados

        Thanks @kumar

      • profile image

        anna Bhore 

        4 years ago

        Thankxx god ... it is useful for writing in the exam like chit

      • profile image

        jesus 

        4 years ago

        idc about ur stupid job ur bad

      • profile image

        kumar 

        4 years ago

        excellent- u saved my life- i got a job because of this

      • mathslover profile imageAUTHOR

        mathslover 

        4 years ago from Barbados

        Thanks vybz

      • mathslover profile imageAUTHOR

        mathslover 

        4 years ago from Barbados

        Thanks vybz

      • profile image

        vybz 

        4 years ago

        good stuff

      • profile image

        Ted Smith 

        4 years ago

        I really like this break even analysis. It really helps you see how much profit you are making or how much money you are losing. I should do this with my business. I might need to have an accountant help me though. I'm not the best at math.

        http://www.neelcpa.com

      • profile image

        tatie mcgee 

        5 years ago

        thanks buh I nid limitations

      • profile image

        tatie mcgee 

        5 years ago

        thanks buh I nid limitations

      • profile image

        moses j 

        5 years ago

        what is the disadvantage of break even

      • profile image

        iq 

        5 years ago

        Thanks a lot .what I have learn here would surely enable me have an A grade in my course

      • mathslover profile imageAUTHOR

        mathslover 

        5 years ago from Barbados

        thank u very much @ csmiravite-blogs

      • csmiravite-blogs profile image

        Consolacion Miravite 

        5 years ago from Philippines

        Breakeven analysis is a fairly easy concept to understand. It is harder to learn in school than to apply it in actual work situations. What this just means is that --- at what level of sales do you need to recoup all your expenses? Say, if your total cost/expenses amounts to $10 and your unit sales price is $2 ----- BEP (Breakeven point) is 5 units. Meaning, after selling 5 units, all incremental sales would be profit.

        This is a big help in business. Especially the small trade stores and outlets that does not have much financial muscle. Good hub!

      • profile image

        GUD JOB BRO 

        6 years ago

        BUT THERE IS ANOTHER DISADVANTAGE AND ITS THAT:

        Break even charts are constructed assuming that all goods produced by the firm is actually sold - the graph does not show the possibility that stocks may build up if not all goods are sold

      • profile image

        zolah 

        6 years ago

        thanx a lot

      • profile image

        TAHA 

        6 years ago

        ITS RUBBISH

      • profile image

        MTALHAASIF 

        6 years ago

        Your knowledge is highly appreciated . THANKS A LOT

      • profile image

        cj 

        6 years ago

        thank you so much guys didn't know about the limitations of breakeven analysis nd diddnt know that it has some merits and demerits......thank you so much now i understand so much bout da topic

      • profile image

        MOZIEY OBY CHINS 

        6 years ago

        THANX GUYZ

      • profile image

        MOZIEY OBY CHINS 

        6 years ago

        THANX GUYZ

      • profile image

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        7 years ago

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        7 years ago

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      • profile image

        merc 

        7 years ago

        If you don’t believe in magic, I think you are mistaken. Don’t get me wrong. I’ve had my doubts, too. But then I found upesaspelltemple@yahoo.com I was having money problems, and a good friend of mine referred me to him. I owned a shoping plaza, and I was a little behind on bills. I had already sold half of my stocks and couldn’t afford to lose any more. Otherwise, my business would be residing in the great pasture in the sky, if ya’ know what I’m saying. I was in some real trouble. I needed money and fast. After Upesa cast a money spell on me, I was living easy. I no longer have to worry about my shopping plaza, and I also am increasing my stocks quantity quickly. I couldn't have done it without you I was having money problems, and a good friend of mine referred me to him. I owned a shoping plaza, and I was a little behind on bills. I had already sold half of my stocks and couldn’t afford to lose any more. Otherwise, my business would be residing in the great pasture in the sky, if ya’ know what I’m saying. I was in some real trouble. I needed money and fast. After Upesa cast a money spell on me, I was living easy. I no longer have to worry about my shopping plaza

      • mathslover profile imageAUTHOR

        mathslover 

        7 years ago from Barbados

        you are welcome!!

      • profile image

        Rabion 

        7 years ago

        Thank u for work,it helped me a lot.

      • profile image

        pep 

        7 years ago

        thankx alt u've helped me undstnd more abt break even analysis

      • mathslover profile imageAUTHOR

        mathslover 

        7 years ago from Barbados

        you are most welcome

      • profile image

        ana 

        7 years ago

        tanx you made me knw all i wnt to knw concerning d bep and its goin a long way in helping to d my assignment. tanx man kip it up

      • profile image

        ussy 

        7 years ago

        no ud stufff

      • BizVT34 profile image

        BizVT34 

        7 years ago from USA

        Good stuff on break-even. However, I like to pair it with a cash flow forecast. I'v seen many businesses that were break-even go bankrupt because they run out of cash. Here's a 30 Second biz lesson on cash flow https://hubpages.com/business/Cash-Flow-vs-Profit...

      • profile image

        gabriel mpeza 

        7 years ago

        thanks 4 the time spent in building our capacity.again thanx a lot.NUR Rwanda

      • profile image

        rahyan rasool 

        7 years ago

        i found this really discriptive

      • profile image

        Nady 

        7 years ago

        I finally got a job!!! I start tomorrow and it will go for 2 months. What a relief! What's funny - sort of - is that Friday I got rejected for one job and got hired for this one within a half hour of each other. I am so relieved and happy. MANY THANKS FOR YOUR HELP Dr.(gbocotemple@yahoo.com)!!! Especially for the extra time - very nice and very appreciated...

      • profile image

        Stanley Relson 

        7 years ago

        Thankyou very much for the valueable information. i now know that the breakeven point is the point at which the revenue and the cost lines intersects. moreover i now the adventages and the dis adventages that it has.

      • profile image

        love singh sikarwar 

        8 years ago

        ii like all these information about breakeven point from love singh sikarwar lucknow, BBA student contect no 07860529428

      • mathslover profile imageAUTHOR

        mathslover 

        8 years ago from Barbados

        Thanks a lot crystolite i am glad you have taken some knowledge from this hub with you.

      • crystolite profile image

        Emma 

        8 years ago from Houston TX

        thanks for telling me about Breakeven analysis I now know that is all about calculation and also had advantage and disadvantages.

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