Methods of Break Even Analysis

An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Methods of calculating break-even point is:

The Equation Method:

The equation method is based on the cost volume profit – cvp, formula:

Pq= Vq + FC + Profit

Where,

p is the price per unit,

q is the number of units,

v is variable cost per unit and

FC is total fixed cost.

The Contribution Margin:

The contribution margin approach to calculate the break-even point that is the point of zero profit or loss is based on the CVP analysis concepts known as contribution margin and contribution margin ratio. Contribution margin is the difference between sales and variable costs. When calculated for a single unit, it is called unit contribution margin. Contribution margin ratio is the ratio of contribution margin to sales.In this method simple formulas are derived from the CVP analysis equation by rearranging the equation and then replacing certain parts with Contribution Margin formulas.

The Graph Method:

The graphic method of analysis (below) helps you in understanding the concept of the break-even point. However, the break-even point is found faster and more accurately with the following formula:

Q = FC/ (UP - VC)

where:

Q = Break-even point in units of production

FC= Fixed Costs

VC= Variable Costs per Unit

UP= Unit Price

Therefore, Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)