As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. It is also known as Cost Volume Profit Analysis. Cost, Volume and Profit, which explores the relationship existing amongst Costs, Revenue, Activity Levels and the resulting Profit. OB represents the total fixed costs in the business. Break even Analysis is the analysis of three variables viz. Claiming at age 62 will net a total of around 470,000 in benefits through age 90. In the diagram above, the line OA represents the variation of income at varying levels of production activity (output). The point at which the sales (total revenue TR) line crosses the total cost (TC) line is the breakeven point. If you wait until 70 to begin Social Security, your benefit would increase to 2,480 each month.Plot the Sales on X axis, Output on Y axis.Calculate fixed cost, total cost and Sales at different levels of output in a table.Margin of Safety: The horizontal distance between the breakeven level of output and the current level of output is known as margin of safety. Any output in excess of break even generates profit for the company. If a business is unable to reach this level of output it will suffer a loss from this product. That level of output where there is no profit or loss. Revenue: income from sales of goods and services (Quantity sold X Price)īreakeven point is that level of output where the sales revenue is equal to the total cost. Using graph paper, it is possible to chart the financial data that allows the break-even output to be measured. Variable cost: all costs which change with the change in output. In order to work out the break-even point a business will need to know its fixed costs, the variable costs per unit and the selling price. The break-even point is when total revenues and total costs are equal, that is, there is no profit but also no loss made. Break-even point i.e., intersection point of the chart, shows the level of sales wherein total revenue is. Important termsįixed cost: all costs which do not change with the change in output. It is also known as Cost Volume Profit graph. Management is no doubt interested in this level of output. A stepped line may represent fixed cost more accurately. The break-even point refers to the level of output at which total revenue equals total cost. Criticism of break even analysisįixed cost is represented as a straight line but in actual fixed costs is likely to change at different levels of output. They show the level of sales the business must make in order to break even. These are graphs which show how costs and revenues of a business change with a change in sales.
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