It is the point at which the company neither makes a profit
nor suffers a loss. A company’s break-even
point is the amount of sales or revenues
that it must generate in order to equal its
expenses. This information can be used in
making a wide range of business decisions,
including setting prices, preparing
competitive bids, and applying for loans.
Figure shows the standard break-even analysis framework.
Units of output are measured on the
horizontal axis, whereas total revenue (both
revenues and costs) are the vertical units
of measure. Total revenues are zero if no
units are sold. However, the fixed costs
provide a floor for total costs; above this
floor, variable costs are tracked on a per
unit basis. Without the inclusion of fixed
costs, all products for which marginal
revenue exceeds marginal costs would appear
to be profitable.
In Figure, the break-even point illustrates the quantity at
which total revenues and total costs are
equal; it is the point of intersection for
these two lines (Total cost and total
revenues line). Above this quantity, total
revenue is greater than total costs,
generating a profit for the company. Below
this quantity, total costs will exceed total
revenues, creating a loss.
To find this break-even quantity, the manager uses the
standard equation to calculate the profit,
where profit is the difference between total
revenues (TR) and total costs (TC).
When TC - TR = 0, there is no profit which is the break even
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