Break-even Analysis

Abstract

Break-even analysis is concerned with predicting costs, volume and profit as the level of activity changes. The theory of break-even analysis is derived from the principles of marginal costing and the assumptions and definitions of fixed and variable costs and their behaviours discussed in earlier chapters are used. Break-even analysis can be conducted by constructing a chart or applying a formula. A break-even chart shows the approximate profit or loss at different levels of activity. A formula is frequently used to calculate the break-even point which is the level of activity at which the company makes neither profit nor loss, but breaks even.