Break Even Analysis

IntroductionItalic text

The Break Even Analysis is used to compaire different business cases to identify the most economical case. The analysis based on the calculation of the Break Even Point which is defined as the specific point when the total costs equals the total revenue of a production or a sales. Expenditure and income are the same and the company makes neither a profit nor a loss. Break-even analysis is a technique widely used by production management and management accountants.

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DefinitionItalic text

Before you can start to calculate the break even point for different cases, you need to identify the costs. Cost are shared in two parts of cost, fixed cost and variable cost.

Fixed Cost (FC) - Cost in a specific period of time which are not dependent on the activities of the business.

                         Examples 
                                           - depreciation
                                           - insurance
                                           - interest
                                           - rent
                                           - salaries
                                           - wages

Variable Cost (VC) - Cost in a specific period of time which are varies, more or less, in step with the output of the business. Variable Cost needs to calculate per unit.

                         Examples 
                                           - raw material
                                           - energy usage
                                           - labor
                                           - distribution cost

Total Cost (TC) - sum of Variable Cost per unit plus Fixed Cost

TC = (VC*Unit) + FC

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Break-Even ChartItalic text

In its simplest form, the break-even chart is a graphical representation. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:

Potential locations for company to do the business can be compared on an economic basis. Berlin (X) , Hong Kong (Y) and Denver(Z) are the places you have to analyse based on a specific break even calculation.

  Berlin (X)             75 (VC)                4000 (U)                         150,000 (FC)
  Hong Kong (Y)          50 (VC)                4000 (U)                         200,000 (FC)
  Denver (Z)             40 (VC)                4000 (U)                         400,000 (FC)

calculate the Total Cost (TC) for each location

              Berlin(X) :             TC = $150,000+$75(4000)=$450,000

              Hong Kong (Y) :         TC = $200,000+$50(4000)=$400,000

              Denver(Z):              TC = $400,000+$25(4000)=$500,000