Break-even analysis is actually a simple formulation. However, the formulation is valuable to managers because it shows the relationship among revenues, costs, and profits. To calculate the break-even point, a manager needs to know the unit price of the product being sold, the variable cost for each unit, and the total fixed costs. A business breaks even when its total revenue is just enough to equal its total costs. Total cost has two parts: fixed and variable. Fixed costs are expenses that never change, such as property taxes and insurance premiums. Variable costs are expenses that change according to the output, that include labor costs, raw materials, and energy costs. Break-even point can be calculated using the following formula:
BE = Break-even Point
TFC = Total Fixed Costs
P = Unit Price of the Product being Sold
VC = Variable Cost per Unit
