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Break-even analysis - calculation

Break-even analysis is a method for finding out the minimum level of sales necessary for a firm to cover its costs. At the break-even point the revenue obtained from the sale of a number of items, equals all the costs paid out in making and selling them.

Break-even analysis is a very popular examination topic, so must be practised and fully understood. The IB Business and Management guide expects candidates to be able to calculate break-even using both graphical and formula/quantitative methods.

In reality, the preparation work for drawing the break-even chart will provide the details to make some judgments on the break-even point, so using this or the formula methods means you can check the accuracy of your graph as you draw it!

You must be able to draw or modify a break-even chart and then to analyse its consequences for a firm. To be able to do this you must understand in detail costs and revenues. In an earlier section we examined classifications of business costs and constructed cost curves that represented these costs. If we add a revenue curve to these cost curves, we get the basis for break-even analysis and a break-even chart. In the interaction below we have drawn all these together on a single graph. Click on the various markers to find out more about each curve.

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