Explain the three costs that are used in break-even analysis

Break- even point is the point at which the operating income is equal to the total cost, ie. Total cost= Total Revenue. Break-Even analysis is one of the tool used in Cost-Volume-Profit (CVP) Analysis. Break-even Analysis helps the business the number of units that need to be sold in order to cover the cost or make a profit.

The break-even graph is given above. Revenue is plotted on the graph as a function of the number of units sold. Due to the linearity assumption, the revenue line is a straight line that starts from the origin. Next there is a total cost line, which represents the sum of both variable and fixed costs. More frequently, fixed costs are at the bottom of the stack, and variable costs are stacked on top of the fixed expenses. The value on the horizontal axis at which the revenue and total cost line intersect is known as the break-even point, because, if revenue and total costs are equal, operating income must be zero.

Calculation of break even point

Selling Price, Variable cost and Fixed costs are used to find break-even point.

Break even point in units

Break even point= Fixed Costs/ Contribution Margin per unit

Where CM/unit= Selling price- Variable cost per unit.

Break- Even Points in sales dollars

Break even point= Fixed cost/ Contribution Margin Ratio

where Contribution Margin ratio= Sales/ Contribution Margin or Selling price/ Contribution Margin per unit.