BREAK-EVEN ANALYSIS

A break-even analysis shows the relationship between the costs and profits with sales volume. The sales volume which equates total revenue with related costs and results in neither profit nor loss is lied the break-even volume or point (BEP). If all costs are assumed to be variable with sales volume, the BEP would be at zero sales. If all costs were fixed, profits would vary disproportionately with sales and the BEP would be at a point where total sales revenue equaled fixed costs. However, both are purely hypothetical situations. In actual practice costs consist of both fixed and variable elements.

The BEP can be determined by two methods:

1. Algebraic methods: (a) Contribution margin approach and (b) Equation technique, and
2. Graphic presentation: (a) Break-even chart and (b) profit volume graph.

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