The Break-Even Analysis - Essay Sample

Introduction

Any genuine production activity in business must elaborately explain the nature of its expenditures in terms of costs and revenue. Break-Even Analysis is, therefore, the method or procedure that applies mathematically equational principles and graphical techniques to explain the said production features. The analysis then facilitates the explanation of the whole production cost properties in a summarized manner. It then necessitates the clarity of a company's inputs and outputs in terms of its computational characteristics about production costs, profit maximization, and loss minimization. The technique puts into comparison, the variable and fixed total costs with the level of income of the sales made so that the value, sales made by a business production process and the rate of production can be determined. A concept also ensues in the break-even analysis. The concept is on the break-even point.

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The Break-Even Point

At times a business may experience a state of equilibrium during production. The total fixed and variable costs may compare equally to the revenue or income attained after the sales are made. It happens when the sum of fixed and variable costs is neither less nor greater than the revenue generated, but rather equal to it. At the point, a company generates no loss or profit. The business is then said to be at the Break-Even point. The variable costs in business are expenditures that varies with time in a production encounter because they are affected directly by the changes in the volume of output. On the other hand, fixed costs are those that are not affected directly by the changes in output volume.

Graphical Explanation of the Break-Even Analysis

The use of graphs can explain the analysis in terms of loss minimization and profit maximization when both the fixed and variable costs increase or decrease. As the production output increases, variable costs are encountered. It means that the overall costs which are the sum of fixed and variable costs also increase. When the volumes of output decrease, on the other hand, the sum of variable and fixed costs become greater than the generated revenue. When the sum of fixed and variable costs is the same as the income, then neither a loss nor a profit is made. The explained becomes the Break-Even point.

A Mathematical Explanation of Break-Even Analysis

Computationally, the use of mathematical equation can also elaborate the technique concerning profit maximization and loss minimization whether both the variable and the fixed costs lowers or rises. A profit margin of $ 3,333 units is realized when the fixed cost amount of $ 3.00 per unit break is less than the generated revenue whereas, a profit margin of $ 1,579 units is experienced when the fixed cost amount rises to $ 4.00 per unit break. The rise of the fixed cost amount narrows the profit margin and, therefore, has the consequence of reducing the profit from $ 3,333 units to $ 1,579 units.