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Neha Tikoo, Lovely Professional University Unit 14: Break Even Analysis

Unit 14: Break Even Analysis Notes

CONTENTS

Objectives
Introduction
14.1 Meaning and Concept of Break Even Analysis
14.2 Uses of Break Even Analysis
14.3 Advantages of Break Even Point

14.4 Limitations of Break Even Analysis
14.5 Methods of Break Even Analysis
14.5.1 Algebraic Method
14.5.2 Break even Chart

14.6 Summary
14.7 Keywords
14.8 Self Assessment
14.9 Review Questions
14.10 Further Readings

Objectives

After studying this unit, you will be able to:

z Define meaning and concept of break even analysis
z Discuss uses of break even analysis

z Explain advantages and limitations of break even analysis
z Describe methods of break even analysis
Introduction

Break even is the point where total revenue equals the total costs (variable and fi xed). It is that
level of activity at which an enterprise makes neither a loss nor any profit. At this point or level,

the sales revenues are just equal to the costs incurred. Below this level the firm will make losses,
while above this level it will be making profi ts.
14.1 Meaning and Concept of Break Even Analysis

Break even analysis examines the relationship between the total revenue, total costs and total

profits of the firm at various levels of output. It is used to determine the sales volume required for

the firm to break even and the total profits and losses at other sales level. Break even analysis is a

method, as said by Dominick Salnatore, of revenue and total cost functions of the fi rm. According
to Martz, Curry and Frank, a break even analysis indicates at what level cost and revenue are in
equilibrium.
In case of break even analysis, the break even point is of particular importance.

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