Steps Involved in Break Even Analysis:

1. Described fixed costs (FC) and sum them.

2. Estimate variable cost (VC) connected with the production of each unit.

3. Fixed costs are drawn on the vertical line representing cost.

4. Then variable costs are drawn originating from the vertical axis at the point where fixed costs end as shown in Figure. These are illustrated as an incrementally increasing cost with change in volume as we move to the right on the volume (horizontal) axis.

5. Revenue line, starting at the origin and proceeding upward to the right, i.e. enhancing by the selling of each unit is then plotted.

Figure: Break-even Analysis

The point at which revenue line intersects the total cost line is called the breakeven point as illustrated in figure. Areas of the graph enclosed among the two lines, below & above the break even point, are termed as loss corridor and profit corridor respectively.

Mathematically specking, it may be calculated as follows:

BEP_R = Break even point in monetary units

BEP_x = Break even point in units of product

P = Price per unit

x = Number of units produced

TR = Total revenue

= P × x

F = Fixed costs

V = Variable costs per unit

TC = Total costs

= F + V × x

At the break even point,

Total Revenue = Total Cost

Or P × x = F + V × x Solving for x, we get

        P × x - V × x = F

or         x (P - V) = F

BEP_x = F /(P - V )

and,     BEP_R = BEP_x × P

=          (F /(P - V )) . P

=          F / (1 -( V/ P))

 Profit = TR - TC

= P × x - (F + V × x)

= P × x - F - V × x

Therefore, BEP_x = Break Even Point in Units = Total Fixed Cost /Price-Variable Cost

BEP_R = Break Even Point in rupees = Total Fixed Cost /(1 - (Variable Cost /Selling Price))

Profit = (Difference in fixed and variable cost) × No. of units produced - Fixed Costs. With these equations, we can directly solve for break even point and profitability.

Break even analysis helps to recognize processes with the lowest total cost for the expected volume. It also identify largest profit corridor and therefore helps in addressing two major issues with which a procedure decision be made successful.