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Break-Even Analysis

Break-even Analysis uses market demand as basis for price determination and also considers cost of production. It involves developing tables and/or charts which are useful to determine at what level of production the revenues will equal the costs assuming a certain selling price. It establishes relationship among cost of production, volume of production, profit or loss, and sale. It determines the break-even point which represents the volume of sale at which costs are fully covered and there is no profit, no less. Sales at levels above the break-even point will result in a loss to the seller. Break-even analysis is a valuable pricing tool to know the expected profit or loss at various volumes of  production and sales.

Break-even analysis is a sophisticated pricing technique which takes into consideration both fixed costs and variable costs. It uses market demand as the basis of price determination. Break-even point (BEP) which represents the volume of production at which there is no profit and no loss can be calculated by the following formula:

BEP =     Total Fixed Costs / Selling Price per unit-Variable Cost per unit = Total Fixed Costs / Contribution margin per unit

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