SUMMARY
Break-even analysis shows the relationship between the cost, price and the volume of output, and helps determine the level of output that covers the total cost and yields a desired amount of profit. In this way it serves as a tool of profit planning.
The first step in this analysis is to determine the break-even point (BEP) which indicates that very point of output that barely covers the cost, or where total revenue is equal to total cost. The process to arrive at BEP is to divide the fixed cost by the percentage of the contribution margin. In case the firm produces more than one product, the fixed cost is divided by the weighted average of percentage of the contribution margin. After BEP is determined, it is easy for the finance manager ...
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