Updated: Feb 22
A calculation using cost and revenue to determine the minimum output required for a firm to make a profit
How does break-even analysis help firms make business decisions?
Using a break-even analysis, a firm can estimate the minimum output required to make a profit or break-even. As such, this forecast is useful in a business plan.
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The total cost (TC) is the sum of the fixed cost (FC) and variable cost (VC).
The firm makes a profit when its total revenue (TR) is more than (is above) the total cost in the chart. At 100,000 unit, the TR is equal to TC. As such, the firm shall earn a profit when it produces and sells more than 100,000 units, as TR exceeds TC. The break-even output is therefore 100,000 unit.
Besides using the break-even chart, the break-even point could also be calculated using the break-even formula.
The sales price per unit is the price of the unit product that is sold, while the variable cost per unit is the unit cost for producing each unit that excludes fixed cost. It is not the same as average cost, as the average cost is the total cost per unit.
A margin of safety is the difference between the current level of output and the breakeven output.
Fixed cost are cost that do not change with the change in level of output. Examples of fixed cost are workers salary, rental of premise and etc.