In the graph, the point at which total fixed and variable costs are equal to total revenues is known as the break-even point. At the break-even point, a business does not make a profit or loss. Therefore, the break-even point is often referred to as the “no-profit” or “no-loss point.” Anything above this point would be a profit for the business and vice versa.
How to Use the Break-even Analysis
The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.
The break-even point identifies the total amount of sales the business needs before profit can be earned. When analysed closely, the break-even analysis also helps the business to identify excessive fixed costs. Since the break-even point is directly related to the fixed costs, reducing and controlling these costs aids the business in achieving a lower break-even point for quicker profitability.
Calculating the Break-even Point
Therefore, the concept of break-even point is as follows:
Profit when Revenue > Total Variable cost + Total Fixed cost
Break-even point when Revenue = Total Variable cost + Total Fixed cost
Loss when Revenue < Total Variable cost + Total Fixed cost
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