Break-even point is the volume of sales at which there is no profit or loss. Break-even charts graphically display the relationship of cost to volume and profits and show profit or loss at any sales volume within a relevant range
Approaches to break-even analysis
- Contribution margin approach
- An equation or a graph can be used to determine a company’s break-even point
Assumptions of break-even analysis
- The break-even chart is fundamentally a static analysis; normally changes can only be shown by drawing a new chart or a series of charts
- Relevant range is specified to define fixed and variable costs in relation to a specific period and designated range of production level
- All costs fall into either fixed or variable cost classification
- Unit variable costs remain the same and there is a direct relationship between costs and volume
- Volume is assumed to be the only important factor affecting cost behaviour
- Unit sales price and other market conditions are assumed to remain unchanged
- Total fixed costs remain constant over the relevant range considered
- Inventory changes are so insignificant that they have no impact on the analysis
- The technology level does not change.
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