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Meaning of Breakeven analysis

Break-even analysis is useful in the determination of the level of production or in a targeted desired sales mix. The analysis is for management’s use only as the metric and calculations are often not required to be disclosed to external sources such as
Investors,
Regulators
FinancialInstitutions(Banks/NBFC) : �

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Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with $0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue. However, the accumulation of variable costs will limit the leverage of the company as these expenses are incurred for each item sold.�

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Case-Bus Service�

An entrepreneur named DK was considering the money making potential of chartering a bus to take people from his hometown to an event in a larger city.
DK planned to provide transportation, tickets to the event, and refreshments on the bus for those who signed up.
He gathered data and categorized these expenses as either fixed or variable:

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Fixed, Variable and Total Costs

Example 1

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Profit and Loss Terms

In terms of costs and revenues there are three possible profit and loss points for a business activity.
Breakeven: total revenue = total costs

Just getting along

Profit region: total revenue > total costs

Putting money in the bank

Loss region: total revenue < total costs

Going into debt

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Profit and Loss

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Breakeven Charts

DK developed an overall total cost equation for his business expenses.
Now DK wants to evaluate the potential to make money from this chartered bus trip.

Total Cost = Total Fixed Cost + Total Variable Cost

= $225 + ($20)(the number of people on the trip)

Let x = number of people on the trip
Thus,

Total Cost = 225 + 20x

Using this relationship, DK can calculate the total cost for any number of people - up to the capacity of the bus.

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Breakeven Charts

What he lacks is a revenue equation to offset his costs.
DK's total revenue from this trip can be expressed as:

Total Revenue =

= (Charter ticket price)(number of people on the trip)

= (ticket price)(x)

Profit or loss can now be calculated as:

Total Profit =

= [Total Revenue] - [Total Costs]

= [ticket price]x – [225 + 20x]

If he charged a charter ticket price of $35, then

= [35x] - [225 + 20x]

= 15x - 225

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