ABSTRACT

This chapter contains break-even analysis; the principles on which it is based; underlying assumptions; guidance on application, and relevant issues; and related models. Break-even analysis is a marginal costing technique which is used to identify how total costs, revenues and profits are related to sales volume. Because unit variable costs and total fixed costs are constant, for one additional unit of production, costs will rise only by the marginal (variable) cost of production and sales for that unit. The break-even point occurs where revenues and total costs are equal so there is neither profit nor loss. Break-even analysis may then be used to forecast the effects on profit of changes in costs and sales volume. Break-even analysis may be applied within budget planning by calculating the volume of sales required to break even and the safety margin for profits in the budget.