Break even anlysis
Can also be calculated as
The most important for any individual or business is to cover its fixed costs.
In the manufacturing process costs are incurred not only in the provision of the necessary labour and basic materials but also in a wide range of services and ancillary expenses, e.g. rent, rates, depreciation, of machinery, interest on borrowed capital etc. These costs tend by tradition and for convnience, to be separated into two main categories fixed costs and vaariable costs.
Fixed costs are those incurred irrespecive of the volume of production.
Variable costs fluctuate with the level of activity.
The latter caegory is often subdivided into further groups depending on the degree of variability. Even direkct costs can be subdivided in so far as the unavoidable costs of keeping a factory closed may be less than those of keeping it at a low production level, e.g. closed factory does not need any administrative staff. The distinction between fixed and variable costs is of course, only relative. In the long term all costs are variable in so far as any productive process is optional.
The break-even chart is a chart used to give information about the viability of an enterprise and effective in warning of approaching disaster. In its simplest form the figures charted are those of total costs and total revenue. When these totals are equal, a break-even point has been reached, i.e. the business is netiher making money or losing it.