![]() Because of its universal applicability, it is a critical concept to managers, business owners, and accountants. While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis.Īs you can imagine, the concept of the break-even point applies to every business endeavor – manufacturing, retail, and service. To make a profit, and the profit will continue to increase as more units are sold. ![]() After the next sale beyond the break-even point, the company will begin At this stage, the company is theoretically realizing neither a profit nor a loss. Once we reach the break-even point for each unit sold the company will realize an increaseįor each additional unit sold, the loss typically is lessened until it reaches the break-even point. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. If it subsequently sells units, the loss would be reducedīy $150 (the contribution margin) for each unit sold. ![]() This loss explains why the company's cost graph recognized costs (in this example, $20,000) even though there were no sales. (the fixed costs) since it recognized no revenue or variable costs. For example, assume that in an extreme case the company has fixed costs of $20,000, a sales price of $400 per unit and variable costs of $250 per unit, and it sells no units. Products, the company will realize a loss. The basic theory illustrated in Figure 3.3 is that, because of the existence of fixed costs in most production processes, in the first stages of production and subsequent sale of the Figure 3.3 illustrates the components of the break-even point: In other words, no profit or loss occurs at break-even because Total Cost = Total The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs.
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