9.3 Breakeven Analysis

Breakeven analysis is a widely used resource allocation technique to help managers determine breakeven point.

To compute breakeven point (BE), a manager needs to know the unit price of the product being sold (P), the variable cost per unit (VC), and the total fixed costs (TFC).

An organization breaks even when its total revenue is just enough to equal its total costs, which has two parts, fixed and variable.

Fixed costs are expenses that do not change regardless of volume, for instance, rent and property taxes.

Variable costs change in proportion to output and include raw materials, labour costs and energy costs.

The breakeven point can be illustrated in the following formula:

                                    BE = TFC/ P - VC

This formula tells us that:

Total revenue will equal total cost when we sell enough units at a price that covers all variable unit costs; and

The difference between price and variable costs, when multiplied by the number of units sold, equals the fixed costs.