## 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.

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.

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.

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:

Scroll to Continue

• 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.

Genuslee on September 07, 2020:

anoymouss on June 12, 2020:

thank you

delight on March 26, 2020:

Thanks a lot i hv learnt a lot

,smelly bastard on February 11, 2020:

that was shocking I leanrt nothign

sniff my hock on December 11, 2019:

i drink rice thru a straw

hi_im_rice@icloud.com on October 14, 2019:

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

floor man, master in the art of coolness on October 14, 2019:

hmmm yes the floor here is made of floor

rhys dee on October 14, 2019:

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

callum cru on October 14, 2019:

amazzzzzing education :)

Petros "Zakes" Jiyane on October 04, 2019:

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

Joel on September 27, 2019:

BingBong on July 17, 2019:

Thank you so much this is very handy

bothwell nyamayaro on March 27, 2019:

that is splendid

charles on February 11, 2019:

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

alima on January 25, 2019:

thanks

jenny on January 21, 2019:

this really helped my business, xd lol

abdi big head on December 13, 2018:

so goo

Name on November 15, 2018:

thanks, this helped me in my business work :D

Thanks. on October 04, 2018:

Thanks.

meera on May 26, 2018:

how can we do the chart

devvo1 on May 24, 2018:

if you want some i will give it ya

SparklyBubble on March 15, 2018:

Thanks Thanks thanks I'm greatful on March 13, 2018:

Welikhe Geofrey on March 04, 2018:

Thanks Very good

prayer on February 16, 2018:

helped a lot .thanks hey

Sofia Dotkova on January 30, 2018:

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

Chamali on January 29, 2018:

Why breakeven analysis can work only for single product

jimmy on January 25, 2018:

cheers jeff

hello, is it me you're looking for? on January 11, 2018:

varun kumar jain on November 27, 2017:

awsome thing

anonymous on October 04, 2017:

i don't really understand the advantages

bleesing tylor on June 27, 2017:

helped on hw to calculate breakeven

bob on May 24, 2017:

byabashaija emmanuel on September 22, 2016:

i have learnt how to plan for a certain company

GODFREY GASIGWA on September 21, 2016:

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

rojj on August 13, 2016:

is very useful for me thank u sooo much

hussain on May 10, 2016:

nice

mathslover (author) from Barbados on October 19, 2015:

Thanks @kumar

anna Bhore on October 17, 2015:

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

kumar on April 13, 2015:

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

mathslover (author) from Barbados on February 26, 2015:

Thanks vybz

mathslover (author) from Barbados on February 26, 2015:

Thanks vybz

vybz on February 26, 2015:

good stuff

Ted Smith on January 06, 2015:

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

tatie mcgee on June 26, 2014:

thanks buh I nid limitations

tatie mcgee on June 26, 2014:

thanks buh I nid limitations

moses j on June 09, 2014:

what is the disadvantage of break even

iq on June 06, 2014:

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

mathslover (author) from Barbados on April 18, 2014:

thank u very much @ csmiravite-blogs

Consolacion Miravite from Philippines on April 13, 2014:

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!

GUD JOB BRO on June 03, 2013:

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

zolah on May 13, 2013:

thanx a lot

TAHA on March 26, 2013:

ITS RUBBISH

MTALHAASIF on March 26, 2013:

Your knowledge is highly appreciated . THANKS A LOT

cj on February 01, 2013:

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

MOZIEY OBY CHINS on October 30, 2012:

THANX GUYZ

MOZIEY OBY CHINS on October 30, 2012:

THANX GUYZ

mercy on September 07, 2012:

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, and I also am increasing my stocks quantity quickly. I couldn't have done it without you doctor

dors on September 06, 2012:

I lost my 10 years relationship during April. My ex left me with so much pains and since then i have been heart broken and shattered. I have contact 15 spell casters and 10 of them has rip me off my money without any result. I have Emailed so many sites online looking for a good spell caster till i was directed by a 16 years old girl to cocomadevil.666@gmail.com At first i never believed him because he was requesting for some amount of money to buy items, it took him three weeks to convince me and something occur to mind and i said let me give him a trial.

I was very shocked when Robben called four days after i sent cocoma the items money. He apologies for all he has done wrong and i am very happy that we are together today because he proposed to me last night. I will advise you contact cocomadevil.666@gmail.com because he has done wonders in my life and i believe he can help you out in any problem

Dors

merc on September 03, 2012:

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 (author) from Barbados on June 14, 2012:

you are welcome!!

Rabion on June 14, 2012:

Thank u for work,it helped me a lot.

pep on May 04, 2012:

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

mathslover (author) from Barbados on March 23, 2012:

you are most welcome

ana on March 21, 2012:

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

ussy on February 24, 2012:

no ud stufff

BizVT34 from USA on February 21, 2012:

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...

gabriel mpeza on January 31, 2012:

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

rahyan rasool on January 30, 2012:

i found this really discriptive

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...

Stanley Relson on November 10, 2011:

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.

love singh sikarwar on September 28, 2011:

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

mathslover (author) from Barbados on March 14, 2011:

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

Emma from Houston TX on March 14, 2011: