Break-even analysis: determination of product volume where revenues equal total costs or costs associated with two alternative processes are the same.
Two perspectives:
- Company view: refers to determining how much volume of business the company must do in order to break-even, that is, to have neither profits/losses where total revenues equal total costs.
- Operational view: two processes have equal costs for a specific level of volume.
Revenues versus Costs
Determine how much volume of business, a company has to do to break-even. The volume can be stated in either monetary units/product units.
Linear model assumptions:
- The selling price per unit is constant;
- Variable costs per unit remain constant;
- Fixed costs remain constant.
Choice of Processes
Also used to choose from among alternative processes a company can use.
Assume that both variable costs per unit and fixed costs remain constant.
Break-even point as that volume where we are indifferent with respect to the costs of the two alternative processes.
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